Thank you, Mr. Chairman. My comments coming at the end of our go- around are going to be repetitive of some of the views expressed earlier. So let me just summarize my views. First, I agree with many of the comments around the table that this recovery has moved into a new phase. We’ve moved from the stage of the business cycle where the economy was driven mainly by the consumer to one where business is now doing its share in fostering the expansion. Having more-balanced growth going forward gives me much more confidence that this recovery has legs, and I want to focus my comments on the business side today.
We all know that this was a unique kind of cycle because it was driven more by the business side than the consumer side. While consumer spending continued to grow through the whole recession, business fixed investment and inventory investment both fell and were the major engines for the slowdown that we saw. On the inventory side, we have now gone from a period, including the first three quarters of 2003, of falling inventories to a period where we expect inventories to have grown in the fourth quarter of last year and our forecast has strong inventory growth going forward. We’re beginning to see in surveys that businesses are becoming more comfortable with inventory levels. Now, I fully expect that inventory–sales ratios will continue to push the envelope lower, as business firms continue to improve the procurement and management of their resources. But I think businesses are beginning to express some confidence that sales levels are sustainable and companies are at least beginning to increase inventories to support the level of sales that they see coming.
On the capital spending side, equipment and software expenditures also have turned around in this last period. Again, in the early part of this recession, we saw consumer spending outpacing equipment and software spending. But in the second half of 2003, we began to see a pickup in the pace of the latter. There was some growth in that sector in the second half of 2002, but it really wasn’t until after the Iraqi war that we saw some force in its expansion. And as the survey that accompanied the Beige Book showed—and other surveys reinforce this—businesses now are beginning to plan for increased equipment spending in the coming year.
The other side of the business investment picture that is particularly strong is the business debt picture. While households have not done a whole lot to mend their balance sheets and they continue to run high debt levels, businesses clearly have made substantial progress. The flow of funds data show with regard to the financing gap in the last two quarters that cash flow due to strong profitability more than covers the capital expenditures that businesses have undertaken. This should provide further legs to support the business fixed investment that would keep this recovery on more balanced ground. So again, I think financial conditions give us strong hope.
As many other members have pointed out, the one part of this balanced recovery that is stretching our ability to understand is the employment story because the data are giving mixed signals. While the payroll numbers continue to show very disappointing results in light of how fast and how durable spending has been, I believe that it’s due to productivity and that we are in the early stages of improving business confidence that will bring people back to work. But I also am looking a little more at other indications of improving employment conditions, namely some of the data that come from other sources, particularly self-employed income. Over the last year, the incomes of people who are self-employed have grown by 50 percent more than the growth in overall personal income. It may not be so much a formal business expansion as this self- employment income that is creating multiple legs for the recovery and showing up in the household but not the establishment survey.
The profitability of major businesses could be forcing up nonfarm proprietors’ income for the same reasons, or it could be that more people—either out of necessity because they’ve been laid off in corporate restructurings or because of lifestyle choices—are choosing to be self- employed. So, we may have a different type of labor force going forward. I think we’ll have to wait for more data to see what the end result is going to be. Either way, I think this shows that small businesses tend to lead employment growth.