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

Thank you, Mr. Chairman. As far as the District economy is concerned, we have the usual mixed bag of readings on activity. But overall I would say that the recent tenor of the incoming information has been perhaps a bit better. What I’m going to discuss is based a little on data but comes mostly from anecdotes heard at a recent meeting of our Advisory Council on Small Business, Agriculture, and Labor and at a meeting with the leaders of the Twin Cities financial community.

Housing has continued to be a bright spot, at least through March. All indicators of housing activity in the District have been quite favorable. As far as the industrial sector is concerned, I would say that, at worst, conditions have stabilized, and some small manufacturers are suggesting that activity is picking up. The trucking industry in our part of the world seems to be quite busy, although the large amount of consolidation in that industry may be a contributing factor. But I would say that overall there is certainly some optimism among small manufacturers and others in industry that the next six months will be better than the last six to twelve months.

Consumer spending for the most part has held up, and credit quality doesn’t seem to be a concern among the vast preponderance of banks. On the negative side, there certainly has been no discernible improvement in labor market conditions, and no dramatic increases in hiring appear to be under way. Pressures on state and local government budgets persist, and we haven’t seen all of the ramifications of that yet. The major airline based in Minneapolis is suffering, as are most of the other major airlines, although to date its problems aren’t quite as severe as some of the higher profile ones that we are all aware of.

Finally, based on conversations with our contacts, there doesn’t seem to be any reason to expect a quick acceleration in capital spending. The story I got on that really has three parts, some of which are related. One is clearly what I would call a productivity story. Businesses simply have found ways to produce more with the same inputs. They were quite explicit about that, and they seem to feel that it has some way to go. Related to that, there is very little pressure on capacity so there’s no stimulus to business capital investment coming from capacity pressures. Moreover, some businesses, as others have commented already, have been busy restructuring their balance sheets and want to get that completed before they contemplate sizable capital spending projects.

As far as the evidence on the national economy is concerned, I read it the way others have done, I think. Clearly it has been on the soft side, which has produced what I would expect—caution among forecasters and among the business community. I share that caution at this stage. But I try to remind myself that there’s always the danger of getting whipsawed here by marking down the forecast just as conditions are about to get better or vice versa. One thing I know for sure from the days when I was doing a lot of bottom-up forecasting is that, in sluggish circumstances such as this, it’s very hard to convince yourself that economic activity is actually going to pick up. It’s just the nature of the beast. Today, outside of defense spending, it’s hard to envision an acceleration in most of the components of aggregate demand. Yet we know from history that sooner or later the economy does pick up, especially when the fundamentals—and by fundamentals I’m talking here about productivity and the stance of monetary policy and fiscal policy—are favorable.

But in addition, I view Dino’s description of financial market developments, with essentially a rise in equity prices in many parts of the world and declining credit-quality spreads, as confirming what we already know, which is that in the past several weeks the big things have gone right. By that I mean that the war ended successfully and quickly, energy prices came down significantly and rapidly, and earnings have been at least no worse than earlier feared or expected. All of that gives me some comfort, but it doesn’t help me answer the question as to when we might actually see some acceleration in economic growth.

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