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

Thank you, Mr. Chairman. My comments about economic conditions in the Fourth District are not too different from those that my colleagues have already reported about their Districts. Moreover, conditions in our region haven’t changed very much since my last several reports. The Fourth District’s economy is poised to expand at a faster pace in the second half of this year, but reasonable doubts still exist about the timing and the extent of that expansion. District business leaders and bankers I’ve talked to are still expressing caution if not outright skepticism about the environment. The bankers continue to enjoy fee income from mortgage refinancings, but they know they can’t rely on that product line to sustain their business indefinitely. They look forward to expanding their commercial and industrial loans, but their most creditworthy customers have yet to see any need to draw down their credit lines. Business firms still seem to place a premium on staying liquid. For example, several members of our Business Advisory Council indicated that their customers are extending the period over which they are making payments. Some of them are extending it by thirty to sixty days, not because they don’t have the cash to pay but because they want to conserve their cash and stay more liquid.

Another condition that hasn’t changed in several months, as many others have already noted, is the aversion to business investment. I continue to question business people closely about their capital spending plans, and I’ve yet to find any concrete evidence pointing to a firming of spending plans later this year. There is just too much excess capacity in too many firms. Also, in line with what President Poole reported earlier, several manufacturers have told me that there’s a glut of used capital equipment on the market and, because of the glut, prices are quite low. Some firms with very strong balance sheets are buying this equipment and warehousing it until demand picks up, reasoning that in the worst-case scenario they can just sell it again. However, most firms I’ve talked to don’t want to buy any capital equipment even at these low prices. The equipment they already own has lost significant market value, weakening their balance sheets. Lenders, consequently, are less willing to advance credit to these firms. Business conditions haven’t deteriorated—just the balance sheets.

Many manufacturers in the District also have become increasingly more pessimistic about their ability in the longer term to compete against firms that have located production facilities outside the United States, especially in areas like China, where labor costs are quite low. Some of these manufacturers are recalling the shakeout that occurred in the 1980s after a long period of dollar appreciation. In today’s environment, manufacturers are still cutting their prices but are facing higher input costs for both raw materials and labor benefits. They fear that we’re in another ratcheting down of industrial activity in this country—a structural adjustment that they say began in late 2000 and could persist for several more years.

Turning to the national economic outlook, if I generalize what I’m hearing from my District contacts—many of whom have operations nationally and internationally—one inference that I can draw is that business fixed investment may be weaker than in the Greenbook path, at least for the next year or two. It could be that the negative tone I’m hearing from these business people is contemporaneous and not predictive of their future investment plans. If that’s the case and the negative tone simply reflects the current cautious environment, then when economic activity picks up we may indeed see the stronger business fixed investment portrayed in the Greenbook. However, if the negative tone is more foretelling of problematic fundamentals, then perhaps it reflects a reduced expected return to new investment. So it may be telling us that the equilibrium real rate of capital has moved down somewhat and will remain lower for a longer period of time than we thought. I expect we’ll talk more about that during the policy discussion. Thank you, Mr. Chairman.

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