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

Thank you, Mr. Chairman. Economic activity in the Seventh District remains sluggish. Although the overall business view is negative, I’m hearing marginally better reports than I did in March. At least part of this change in tone reflects the fact that many of our contacts were expecting greater war-related destruction than actually materialized.

Airline ticket sales did fall sharply because of the war and the SARS outbreak. However, United Airlines reports that demand has rebounded in the last few weeks, and they expect the trend to continue. Their domestic and transatlantic bookings have returned to early March levels. Bookings for Asia also have improved, after declining nearly 60 percent following the SARS outbreak. We polled our directors and other contacts regarding SARS, and with the exception of the airlines most expected a minimal and manageable effect in the near term. But if SARS is not contained, they thought it could harm new business and product development down the road.

Our retail and casual dining contacts feel that consumers have become more upbeat. That has yet to show through, however, to actual spending. As we know, light vehicle sales rebounded in March and held up in April. On the one hand, the Big Three were relieved that the war didn’t overly depress demand. On the other hand, their April results were weaker than they expected given the sweetened incentives. Interestingly, and a sign that the market has become even more competitive, some of the big foreign nameplates have begun offering zero percent financing for the first time.

Outside of autos, District manufacturing remains weak. But here again reports tend to be slightly—and I emphasize slightly—more upbeat than before the war. One industry analyst told us that rebuilding Iraq will help to absorb the glut of used heavy equipment. Some equipment producers have already seen a jump in price quotes from the Middle East. A major producer of airport equipment— ramps, carts, generators, and so forth—noted that orders, primarily from international airlines, had increased last quarter. That was the first improvement in over a year.

Our contacts report that more firms are finally deciding to replace older equipment. But in terms of capital expansion, firms continue to delay moving forward even though many have spending plans in place with contracts negotiated and cash on hand. Apparently they are still concerned about cost containment. A project that used to require three signatures now requires six. Businesses also remain reluctant to hire. Both of the national temporary help firms that we speak with remain disappointed about their billing hours. Their business is clearly weaker than during the recovery period following the 1990-91 recession. We received the preliminary calculations for Manpower’s third-quarter hiring plan survey, and the index fell from 11 to 6, which is the lowest level since 1991. However, the survey was completed just before the beginning of the war so that was obviously a period of great uncertainty. These data are confidential and the company has told us it won’t be releasing them until June 17, which is later than normal.

Turning to the national outlook, the sparse data on the postwar economy are mixed. The April employment report, unemployment insurance claims, and the information from our temporary help contacts indicate that labor demand remains weak. On the plus side, consumer confidence has rebounded despite the weak job market, oil prices are down, stock prices are up, and equity price volatility and credit spreads have fallen. Of course the big question remains whether business spending will finally pick up now that the burden of geopolitical uncertainty is substantially reduced.

It’s hard to be optimistic about the near term. Hiring plans are still on hold, and excess capacity continues to top the list of concerns in many firms. Nevertheless, it’s certainly plausible to expect the business sector to generate more growth as we move through the year. The anecdotal reports provide at least modest support for the scenario in which capital spending and hiring gradually strengthen. Moreover the fundamentals, particularly the underlying trend in productivity, are strong enough to support the eventual pickup in growth.

In general we agree with the Greenbook that the projections for this year, if realized, would still leave the economy with large gaps in resource use as we enter 2004, which is a concern. Furthermore, core inflation, which is now low, will probably head lower. Of course, lower inflation would raise the real fed funds rate. That would not be a problem for the economy if it were solidly in recovery, but higher real rates would be a concern if the current weakness is expected to continue into the second half of this year. In the latter scenario we would probably want to ease policy. I can see either of the two scenarios unfolding. At this point I think it’s too early to know. We should have a better reading of the postwar economy by our next meeting.

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