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

I think I may be able to clarify the Wal-Mart outlook a bit. There’s been a lot of publicity that Wal-Mart reported November year-over-year same store sales to be, I think, 0.1 percentage point down. The Wal-Mart take on the situation is that the problem is about 75 percent in the forecast that they had and about 25 percent that sales are actually coming in a little weaker than forecast. The big miss is that, in the year-over-year comparisons, there’s an enduring effect that was larger than they had earlier realized of the sales in the hurricane-affected regions. People whose homes were destroyed went out and bought toasters, apparel, and all sorts of other things to replace the stuff that they lost, and that pumped up year-ago sales. They’re expecting that effect to continue to affect year-over-year comparisons through March, obviously tapering off. The other thing that they note—and this I think is perhaps a little more problematic—is that they continue to open lots of stores. They know that the store locations in some cases cannibalize sales from existing stores. So when they try to make allowance for those things, they say that October and probably also in November, although they haven’t completed that analysis, would have been about 3.8 percent above, year over year. They would have expected on this basis 4.5 percent to 5 percent. So they are running below the expectation. The overall impression of the holiday season is that it’s going to be good but not great. On the average shopping basket, the prices for goods sold are up about 1.1 percent year over year. Wal-Mart does not see much inflation pressure. They expect to be seeking price cuts from suppliers. Apparently consumer product companies generally adjust prices in the first quarter of the year, and they end up negotiating with Wal-Mart, and Wal-Mart is expecting to ask for some price reductions. A contact with a major money center bank indicates that their analysis of their credit card activity suggests that year-over-year retail sales have decelerated a little. They expect the holiday retail season to be okay but not great.

My contact at UPS said in a conversation last week that the Christmas season has been somewhat slow to materialize in terms of volume since Thanksgiving. When I talked with him yesterday afternoon, he said that probably most of that was a consequence of weather, which delayed their volume. Perhaps more interesting, UPS is expecting international volume to be up 11 percent in 2007 compared with 2006. Their ’06 over ’05 output was 19.4 percent; 19 to 11 is a significant decline in growth. For domestic express, they’re expecting ’07—I guess the annual average—to be up 1.2 percent over ’06; the ’06 over ’05 comparison was 4.8 percent. So the deceleration in ’07 is significant. On the labor front, they don’t have any particular issue, and they’re not having labor availability issues. My FedEx contact had a similar outlook. FedEx has somewhat downgraded its expectation for next year. Again, he said that the company is starting to see momentum softening “as many others are.”

The most downbeat contact was a large trucking firm. He started off by saying that “things are pretty slow.” He said that the trucking business never had a third-quarter or fourth-quarter peak. They just didn’t have a shipping peak. He said their customers are not too concerned. Shipping rates are down 4 to 5 percent year over year, and they’ve actually cut pay for new drivers. They had increased it back in July. They put the new driver pay back where it had been before, and they have also been laying off some drivers. I guess that’s the main thing. The company is not buying any new trucks next year.

I have a couple of comments on the outlook. To me the only way to reconcile what we see going on in the equity and the bond markets is that the markets together are anticipating declining inflation pressure and continued good economic growth. One market or the other may be making a mistake, but if you want to assume that they’re well-informed people making good estimates, then it seems to me that’s the way to reconcile those observations. My view of the Greenbook forecast is that it’s very sensible. My own assessment is that outcomes above or below the forecast on both output and inflation have roughly equal probabilities; they’ve cut it right down the middle. It makes good sense. Both the Greenbook and the Blue Chip and other forecasters have been reducing their forecasts for ’07. If you look at the Greenbook, Part 1, page 23, there’s a nice chart of how the forecast has come down over this year. That’s all for me right now. Thank you.

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