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

Mr. Chairman, at the last meeting I provided anecdotal evidence, as I always do after my survey of CEOs and CFOs, of a slowdown for some sectors. I spoke of housing, which I’ve been a bit more concerned about to date than even our models have indicated. I referred to slowing trucking activity for the Christmas season, and I reported that the book-to-bill ratio for semiconductors, although that is highly volatile, slipped below 1 for the first time in quite some time. I also cited the aggressive consumer-product advertising as we approach year-end, which is occurring rather early. I concluded that, in netting those reports against the activity of the rails, the shipping companies, and other service-sector activity, growth in the third quarter seemed to have proceeded at a pace slightly north of 2 percent, or at least at a run rate about in that region. Then inflation measured by the trimmed mean, which as you know is how we like to look at things at the Dallas Federal Reserve Bank, though dipping in September was still hovering in the high 2s as measured over the three-month and twelve-month intervals. I expressed that, going forward, the balance seemed to be skewed more toward the inflation side than toward substandard growth.

I would agree with President Yellen and President Moskow, if I heard them correctly, that basically the tails have gotten a little fatter—that is, we’re concerned that there might be slightly less growth, but at the same time we still have concerns about inflation. So I’d like to address the two very briefly. On the inflation front, in October the trimmed mean bounced back to 2.6 percent from the 1.6 percent that we had in September, driven upward, as David mentioned, by accelerating medical care prices and a pickup in owners’ equivalent rent, although that was somewhat slight. The median PCE inflation rate was 4 percent. Of concern to me is that, although the percentage of goods with rising prices fell, the percentage with more-rapid increases rose and components with a rise of over 5 percent have gone from 16 percent to 30 percent of the components measured overall in October.

With regard to economic activity, I think there are some continued negatives and some positives. I’d like to pick up on the negatives that I mentioned at the last meeting. The airlines that I discussed are reporting even more aggressive discounting. One of my contacts, who I think is the longest serving and most successful CEO in the airline industry, said this is the most aggressive discounting that he remembers. Of course, we’ve all seen Wal-Mart’s numbers. There is difficulty in sorting through what is of their own making in terms of their branding and what is the overall slowdown in activity. But the truckers to whom I have been talking are still not noticing the pickup in the Christmas activity that they expected, Mr. Chairman. Other retailers, too, are reporting some softness. There is some discussion of whether or not it makes a difference that we have one extra day in the retailing season for Christmas this year. The Thanksgiving surge that they expected in sales clearly did not occur in almost every category of income except for the very highest. The semiconductor producers are reporting a “grim” outlook in terms of their book-to-bill ratios and what they’re selling forward. I have just one other comment on energy. Perhaps the largest operator for the OPEC countries points out that they have realized 60 percent of their announced cuts—that’s a typical ratio. Al-Naimi, who is the Minister of Petroleum and Mineral Resources of Saudi Arabia, is pressing for another million barrel cut, presumably to bring the total cut up to the 1.2 million barrels that were being targeted. So the negatives seem to still be in place.

As far as the positives are concerned, at least at the margin, I’d like to report on a few of them. One is that convenience store operators are reporting a little turn-up in volume and finally seeing the effect of lower gas prices at the pump, and retailers in the past week have noticed a slight pickup from what they were reporting at the end of the November holiday season. With regard to housing, as you know, I speak to two of the five largest builders, and I’ve added a third to that sample. David, they are reporting what they call a sense of a turn, but this may be their perpetual optimism. But cancellation rates have improved from 40 percent to 32 percent according to the reports, and actually in November there was a gross pickup in unit sales of about 3 percent according to these reports. So they are feeling that some pent-up demand is building. The interesting thing about that industry in particular is that they are all walking away from their options. One of the largest said that they expect to end up with only 20 percent of their land options, and yet land prices have not yet fallen. So I think that’s the next shoe that will likely drop.

Other than housing, in surveying the twenty-six CEOs and three CFOs to whom I speak, I hear no report of consumer or client payment problems or lagging payments, which is often an indicator, on a serial basis, that there is weakness ensuing. Again, going back to one of my favorite indicators, which is a large express shipper, my contact said, “I don’t feel any real changes from what we saw in the last four to five months.” That large express shipper is looking at GDP growth of about 2 percent or slightly north of 2 percent. Also, I like to look at restaurants because they employ perhaps up to 14 million people, so it’s not an unimportant sector. For the twenty-five companies in the casual dining sector, sales have declined. At the same time, their guest count has gone down even further, which indicates what we expected before—if you’ll forgive the pun—a move down the food chain from restaurants like Chili’s to McDonald’s and so on. This is what you would expect in terms of continued tightness, and yet they are beginning to sense a slight turn because gas prices at the pump may be kicking in.

Finally, I want to touch on some negatives disguised as positives. The first is the ready availability of capital. I think Dino was very good in his presentation this morning, as he always is. One CEO of a company in the service sector, largely in the entertainment business, does not see much slowing taking place. He said that the availability of capital is like “dog droppings in Central Park”—no matter where you step, capital is readily available. To an old pension fund manager like me that indicates a potential trip wire, which is what Dino said. So I think risk is certainly there. Another negative disguised as a positive would be the robust activity we’re still seeing in the energy sector, although I would summarize it by saying that the foot has been taken off the accelerator. We haven’t stopped. There’s a bit less rig count in the mix, and yet there’s still a great deal of construction activity, as we find that the petrochemicals are improving their refining capacity and meeting modern standards, and there are huge numbers of coal gasification projects, not just in Texas utilities but also elsewhere in the country.

Mr. Chairman, the labor shortage in the Gulf—the Golden Coast, as we call it—is significant. One oil company alone estimates that, for petrochemical purposes, they are at least 20,000 workers short. The mayor of Texas City, which has the highest concentration of petrochemical plants in the country in his district, called a meeting of all the labor unions last month. The mayor, who sits on our board, said that the unions report that they cannot find workers. If TXU proceeds with the coal gasification plants, they’re looking at 5 million manhours per project, and they have ten projects on the board, assuming that they’re approved. The point is that we do still see a significant shortage of skilled and semi-skilled labor. So as you depart for China, Mr. Chairman, having spoken about the two fat tails, I would urge you to be careful of any Fu dogs with two tails. [Laughter]

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