Thank you, Mr. Chairman. The Tenth District economy has actually strengthened further since the last meeting, and business contacts are frankly relatively optimistic about the year ahead. I attended a tech conference near Boulder about two and a half weeks ago. That conference is held each year at about the same time. Last year about 150 people attended. This year about 400 people were there, and they were all very much engaged with projects going forward. So there is a clear improvement in attitudes in some of the technology areas. Also, energy activity in the District continues to be strong, primarily in the natural gas area, and is very positive generally speaking. Manufacturing activity actually continued to expand in December. Both production and new orders moved further above year-ago levels, with orders posting their strongest growth in some years. Inventories also rose above year-ago levels for the first time in three years.
In our survey on capital spending we did see some improvement on net. Thirty-one percent of the manufacturers said that they expected to increase expenditures in the next six to twelve months, and that is a substantial improvement over the numbers for our region in the previous survey last May. Many firms that are planning to increase spending cited the need to replace primarily IT and some other equipment. Having said that, some respondents provided specific comments indicating that they were going to hold onto their current equipment until it actually fell apart on them before they would invest again. They were absolutely committed to not spending money at this time.
Commercial real estate activity is still weak in our area. Vacancy rates actually edged up in the fourth quarter, and we are not seeing a lot of construction activity in that sector of our regional economy. Labor markets also remain soft, but the underlying trend of layoffs and new hires was a little more favorable this time. Adjusting for some of the mad cow effects on meat packing plant activity, we have seen more hires than layoffs based on our own surveys.
In the agricultural economy, 2003 was a very strong year for our region and I think nationally, primarily because of the decline in the dollar and the demand overseas. We actually are going to have some of the highest earnings in several years in the agricultural sector. In fact, agricultural income hasn’t been that high in the last seven years. So that is really positive. And we now expect that the mad cow effect will be less severe than we had originally thought, based on talks with various groups in our region where that threat is so important.
Turning to the national outlook, I would agree with those who say that recent indicators confirm a strengthening in the economy looking ahead. Our projection for GDP growth is not as strong as the Greenbook’s; we have it more in the area of 4½ percent. But I think that the differences are a matter of degree. The direction is the same, and some of the reasons for the improvement are the same, including very accommodative monetary and fiscal policies and favorable financial conditions. So I think we will see some improvement.
One comment I did want to make is related to the point that President Poole mentioned about looking at the output gap as an indicator. I, too, am a little uneasy about putting much weight on the output gap because the estimates of its size are so varied. The same is true of some other parameters such as the natural rate. The gap could be as little as ½ percent of GDP or as much as 2 percent, and that is too wide a range on which to base judgments. So I think President Santomero is right in asking what areas we are going to look at to help guide us in our policy decisions in the future. That is a very important question.
As for the inflation outlook, we think inflation is most likely to increase over the year by perhaps as much as ½ percentage point, given the fact that we have a very accommodative monetary policy and fiscal stimulus in the pipeline. I think that is an important consideration for us as we look forward. I’ll stop at that.