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

Thank you, Mr. Chairman. Our recent Business Advisory Council meeting wasn’t nearly as downbeat as Cathy Minehan’s, and maybe it’s because at least one member who didn’t show up was from a company in bankruptcy! [Laughter] The general sentiment of the group was summed up by one of the participants who said that the economy has found the bottom and now it’s only a question of how rapidly momentum builds. There was also a general consensus that equity markets have seen their lows and it’s only a question of how slowly or how rapidly the markets strengthen. Several expressed the belief that depressed equity markets have been more of a factor in reducing job-hopping than has the softness in local labor markets. In fact, some reported recent firming in their local labor markets.

Regarding investment plans, two reported that they had taken off holds on investment spending since the previous advisory council meeting in the summer. Another said that his company believed that this was a good time for bottom fishing for equipment bargains and for depressed or bankrupt companies that are for sale. One specific report on investment spending, from an owner of what I think are now eight McDonalds restaurants in Kentucky, was that the corporation is shifting emphasis to upgrading existing stores rather than opening new stores. McDonalds announced that $3 billion will be spent in the next couple of years on new technology for its stores. One of the items mentioned was radio frequency remote order-taking devices. We found from directors that Bob Evans, Applebee’s, Wendy’s, and Kroger’s, all District companies, also are spending more on technology to improve their operations.

As would be expected, suppliers to the residential construction sector are requiring mandatory weekend work through the end of the year. In commercial construction, one contact asserted that companies that are capable of build-to-design and turn-key projects are getting contracts while pure generic construction contracting is, in his words, “dead in the water.” A maker of upper-end tools reported that both domestic and foreign orders in September and October were the best so far this year. From the bankers on our board of directors we heard that commercial loan demand and new applications have picked up recently. But members of our Business Advisory Council said that this may reflect only the fact that even medium and small companies are now spreading their business over three or four banks rather than relying on a single lender as they had in the past.

A manufacturer of packaged foods said that catalog and Internet sales have strengthened, with a noticeable pickup in items considered to be holiday season types of goods. Most important to this director, corporate orders for customer and employee appreciation gifts were coming in strong; this reverses the dramatic drop they saw in sales of such items this time last year.

Regarding corporate earnings, one of our directors who sits on three industrial boards, Timken, Diebold, and Sherwin-Williams, reported that all three had strong third-quarter earnings and that their share prices also were recovering. This led our research assistants to turn to their Bloomberg terminals, and they found that thirty-nine S&P 500 companies are headquartered in the District; twenty-eight reported improved earnings for the quarter, and their share prices generally have risen from earlier lows. A director who has an investment management firm said that after a dismal September he thoroughly dreaded the coming of October. But in the end it was the best October in his memory. In what I take to be a pure signal of inflation, he also reported that companies are boosting retainers and meeting fees for directors by as much as 50 percent. No productivity there! [Laughter] I suggested that he take up the topic of Reserve Bank director fees with my successor. [Laughter]

Regarding national and global issues, I continue to believe that the near term is dominated more by fear and uncertainty than it is by any kind of risk and reward considerations. So I have nothing new to add.

I want to return to and extend some of the remarks I made at the last meeting about secular trends in manufacturing, especially nondurable goods manufacturing, that I believe will overshadow any cyclical trends one might be trying to find. Forty years ago, John Kenneth Galbraith said that the time would come when 2 percent of the population would produce all the things that we need. In that regard he may have been correct, but it depends on one’s view of what we actually need versus what we want. He didn’t say much about the things we might want. He made that statement about productivity trends not because he thought all the items were going to come with labels that said “made in China” but just on the basis of extrapolating the trends in technology and productivity.

In September I traveled to a small town that I’ve visited previously, and there were three new stores, with names I didn’t recognize, within walking distance of each other. I went into one of them and picked an item off the shelf, and there was no price label on it, so I asked the clerk how much it was. She said one dollar. So I picked up another item, a larger quantity of a similar product, and asked how much it was. And she said one dollar. I said I didn’t get it. She said everything in the store is one dollar always. I said, “cool.” [Laughter] This is price stability. But I asked how that could be. Why would anyone buy the smaller quantity instead of the larger quantity for the same price of one dollar? Expressing some frustration with my inability to grasp basic economics, she explained the quality difference between the two but repeated that every item in the store always costs the same amount. After making purchases there I went to the next store and asked, “Is everything in this store the same price?” And the clerk said that everything in the store costs the same, which is not exactly what I asked but it was close enough. The same was true in the third store; literally everything in the store was the same price.

The additional wrinkle to this story that made it really curious to me is that I was in Canada. Those were Canadian dollars people were spending. I went back and reported this to our economists, and one of them who also goes to Ontario frequently was curious about it, too. He found a store in northern Ohio called Dollar Tree that works the same way. He said that exactly the same items that were priced at one Canadian dollar were priced at one U.S. dollar, which tends to suggest that the actual costs to manufacture these products have fallen to a trivial level compared with all the other value added involved. That suggests, among other things, that the labor component of what we call nondurable goods is going to continue to vanish to such a point that international competitiveness will no longer be a factor.

This gives rise to what I consider the Rubbermaid effect. That is, there comes a point where the labor component is so small that, as one manufacturer put it, labor could be free in China and China still could not compete. That’s because the Chinese manufacturers can’t get five blue buckets to a south side Omaha store tomorrow morning, but that store knows how many blue buckets it sold today and local manufacturers can get replacements there quickly. And this is happening not just in the nondurable goods area. A steel manufacturer whose firm is headquartered in our District said that over the past ten years the average increase in labor productivity, output per hour, at his firm was 9 percent per year. That means they can produce the same amount of steel with less than half the workforce they used ten years ago. A member of our Small Business Advisory Council who has a printing business said that he now produces the same volume—though I don’t know how he measures his volume—with half the labor force he employed some years ago and he’s still operating at only 60 percent of capacity. In his view, his competitors overinvested in technology. All this not only affects what we think about the labor market data, but over time as this trend continues we’re also going to have to think differently about the price statistics, at least for certain types of goods. I say that because of what I saw as very clever tie-in sales in order to price all items at one dollar. Thank you, Mr. Chairman.

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