Thank you, Mr. Chairman. The District economy is doing reasonably well, and most indicators of economic activity are positive. Let me summarize that situation quickly, starting with household demand. On balance, auto sales continue to be fairly strong, and tourism is having a good year in the District. Overall consumer spending is growing moderately, aided in part apparently by the return of Canadians to some of the northern border cities—I presume mostly as a result of changes in the exchange rate. Residential construction and related measures like housing sales remain another bright spot; 2003 was a record year in many parts of the District. Most people in the marketplace expect another good year in 2004— perhaps not up to 2003, but quite strong nevertheless.
Manufacturing activity is improving, and the outlook for capital spending is clearly a bright spot. We have the benefit of the survey that was done by the staff, but the most impressive report on the capital spending outlook came from one of our directors who surveyed a number of large firms in Minnesota. Almost uniformly these firms are planning double-digit increases in capital spending for the current year for a variety of interrelated reasons having to do with capacity expansion, replacement demand, cost reduction initiatives, and so on. That was clearly a much more positive report than we had been getting previously and more optimistic certainly than I would have anticipated, at least until recently. Mining activity has also picked up, and that is mostly taconite mining in northern Minnesota, which probably reflects what is going on in the steel market. The situation in commercial and industrial space is diverging. Absorption of industrial space in the Twin Cities market was quite substantial in 2003—the best absorption in three years or so—but office vacancies remain at an elevated level. I think we are seeing some modest improvement in labor market conditions in the District, and wage gains generally remain in the 3 to 4 percent per year range.
As far as the national economy is concerned, I think the outlook is positive, and I am reasonably optimistic in that regard. My own forecast isn’t quite as strong as the Greenbook’s; but basically, whether I adhere to mine or I take the Greenbook baseline, I’m pretty comfortable with the outlook. I do think the uncertainty around the forecast has diminished. One issue I would point to that has been talked about by others is the labor market. I remain skeptical that we will see overall employment gains of the size indicated in the Greenbook. There is no doubt, at least in my judgment, that employment will come back and probably come back substantially. But I am a little skeptical that we will achieve employment gains in the next couple of years as large as those anticipated in the Greenbook. Having said that, I don’t think that is going to have any profound effects on the way the economy performs because the difference is likely to be made up by productivity. Finally, I think the inflation outlook is benign not because of the gap but because inflation has been low, and I expect it to remain low.