Thank you, Mr. Chairman. By most measures, economic conditions in the Fourth District are improving. Households have continued to purchase new and existing homes, automobiles, and light trucks at a solid pace. Bankers in the District are reporting that credit quality in their consumer loan portfolios has been very good. A notable development during the intermeeting period has been the improvement in sentiment regarding capital spending. Whereas several months ago it was common for me to hear from most CEOs that they were not going to invest significantly in new equipment for a “considerable period” of time, [laughter] many business leaders now say that they are willing to do so. This improvement in attitude seems to be due both to a change in mind and to a change in heart. The change in mind comes from a better capital spending arithmetic. Many CEOs are now convinced that demand for their products will remain strong. Moreover, corporate earnings have been excellent, and investors have flocked back to the equity markets. The change in heart seems to stem from the appearance of more stability in the international situation. The paralyzing uncertainty that had been in place has been replaced by more informed risk-taking. CEOs are beginning to act as though we are in an expansion, and they are again beginning to make decisions, especially investment decisions, with more confidence.
Nevertheless, the contrast in business attitudes between capital spending and hiring plans remains striking. My business contacts remain adamant about not expanding worker head counts except as a last recourse. A CFO from a large national retailer told me that she and the company president must approve any net addition to employment anywhere in the company. At the same time, though, while some CEOs express a grudging reluctance to hire, I am beginning to hear from a number of bankers that they are having difficulty finding qualified workers to hire. We are experiencing our own problems in that regard in the District. We are having a difficult time finding qualified bank examiners to hire and a difficult time in our Cincinnati marketplace trying to find employees for some expanded check-processing operations that we are doing there. So labor market patterns are puzzling. The data suggest to me that something unusual is happening both on the supply side as well as the demand side so it is hard to get a handle, as many others have said, about the degree of slack in the labor markets. I think the staff’s decision to lower employment growth in 2004 from its previous projection is a sensible adjustment.
What has surprised me most in the District during the past several weeks has been talk about prices increasing for certain products despite the low inflation rate of which we are all aware. I don’t want to make much of this. It’s just that I haven’t heard the topic of price increases mentioned in quite a while. Commodity prices, both energy and non-energy related, have been increasing for some time. Some manufacturers are now quietly looking for opportunities to pass on price increases in their products. Steel producers have gone from famine to feast. They are enjoying a strong global demand after a period of industrial consolidation. With the strengthening in demand, steel prices have been rising sharply and obviously without the protection of tariffs. Price increases for raw materials and industrial commodities have not found their way into retail prices in any broad-based way. Indeed, we discussed the looseness of the relationship between commodity and consumer prices at the last meeting. In addition, I know that many manufacturers expect that the dollar’s depreciation will provide them with some leverage in a strengthening global economy even though, again, the empirical evidence of that happening is questionable. After all, retail price inflation is still slipping rather than rising, but perhaps the mere fact that there is any discussion about price increases is simply another sign that business persons have regained their confidence in the outlook.
As I think about the national outlook, I realize that, despite my confidence in the prospects for the expansion, I have little confidence in forecasts of the future course of inflation. The output gap and our estimates of the natural rate of interest provide us only rough guidelines in the best of circumstances. Unfortunately, today we have the challenge of trying to decipher inconsistent evidence regarding labor market tightness, accounting for the possibility that some of our measured capital stock is obsolete, and attempting to estimate the underlying rate of growth in structural productivity. My best guess is that we have passed through the point of concern about unwelcome disinflation and are entering a period where the odds favor greater inflation stability. Given that, I believe we should proceed with the strategy that you laid out at our December meeting, Mr. Chairman. Thank you.