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

Thank you, Mr. Chairman. Over the intermeeting period, the Sixth District’s economic activity largely reflected the trends in the nation as a whole. But the magnitude has been amplified by the region’s relatively large exposure to housing-related activities. Specifically, while Florida continues to bear the brunt of the housing correction, we have increasingly heard reports of sales declines in other areas, too. For instance, an announcement at a recent conference of Atlanta homebuilders was that “Atlanta’s ability to outrun the downturn has run out.” The recent survey of the Beige Book would confirm this, in that contacts indicated that 67 percent of the District builders consider their inventory of unsold new homes to be either high or extremely high.

The decline in housing market activity is affecting housing-related sectors such as construction, real estate services, wood products and manufacturing, and carpet production, to which our District is more exposed than are other parts of the country. For instance, Florida has a concentration of residential construction that is about 50 percent greater than that of the United States as a whole, and Florida’s construction employment has been declining at an annualized pace of 10 percent each month since May. Georgia is home to the largest concentration of carpet production in the United States, and these firms have reported that they are scaling back production as well as employment. We expect the negative effect on construction-related sectors to intensify over the next few months as builders complete current projects and significantly curtail future projects. Lending related to real estate has been a significant source of revenue and growth for District banks in recent years. Our banking contacts report that the pipeline of real estate lending has all but dried up. Some also noted concern about the prospective financial strength of smaller builders, although most expect the larger builders to be able to weather the downturn. On the consumer side, asset quality remained good, but some banks noted concern about the potential negative effects from adjustable rate mortgage resets that will occur in 2007. The good news for the housing outlook is that the continued decline in starts and the leveling-off of sales may have arrested the run-up in the inventories of unsold new housing. It’s hard to tell if we’re getting close to the bottom of the housing slump. Several of our builder contacts in Florida say that they expect sales to improve in the second quarter of 2007. Also, most contacts expect a pickup in the multifamily rental market in 2007.

Outside the housing sector, indicators of economic performance in the District were mixed. Nonresidential construction remains at modest levels, with the pace for October and November being about what it was in 2005. Builders expect that the overall pace for 2007 will match that of 2006, and signs are that the demand for office and industrial space is picking up, with lower vacancies and rents beginning to firm. Early reports on holiday retail sales were on the positive side. However, tourism performance in Florida has disappointed in recent months. Visitors to all areas of Florida are down so far in 2006, which could give the state the first year- over-year drop since the September 11 terrorist attacks. The shuttering of the Ford auto assembly plant in Atlanta and the weak performance by GM, Saturn, and Nissan have led us to cut District auto production. However, on net, the strong performance by Mercedes, Honda, and Hyundai has been more than enough to keep overall auto production in the District moving along at a relatively solid clip.

Along the Gulf Coast, much uncertainty remains about the long-term economic recovery of New Orleans. One hope for a signal of recovery was the restarting of the Crescent City’s tourism and convention business. Unfortunately, indicators such as airport traffic and convention bookings have not strengthened over the year and remain well below pre-storm levels. In contrast, a key Mississippi Coast economic engine is up and running—the casinos. [Laughter] All the casinos damaged or destroyed by Katrina have reopened, and gaming revenues have returned to pre-storm levels, in some cases even above those levels. This signal has generated optimism about the eventual recovery of the Mississippi Coast.

Putting aside the problems of accurately calibrating growth in real GDP for the national economy that were discussed in the Greenbook, it seems clear that the slowing of the economy that many of us noted last meeting continues. At the same time, some of the pressures on the inflation side may be abating as well. Housing and its potential spillover effects to other segments of the economy remain a question mark, as does the slowing in manufacturing that now appears to be in progress. However, several factors suggest that the slowdown is transitory and that the risk is relatively small that it will turn into a full-fledged recession. For example, corporate profits remain healthy. Business investment has continued to expand, although a bit more slowly. The most recent labor report is quite positive, with job growth now averaging about 138,000 over the past three months. Going forward, the decline of the dollar suggests that net exports will be less of a drag on our output. This conclusion about the likely path of the economy is also consistent with our own District model forecasts that have changed only slightly from October. They have shifted in almost the same way that the Greenbook forecast has, and the differences are relatively small when all things are considered. Let me stop and save my other comments for the policy go-round.

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