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

So we heard! As for his view on the economy, this small businessman described it as “saw-toothed with a positive bias.” That’s just the way they talk in Kentucky, I think. The saw teeth are obvious in the month-to-month changes that are regularly reported. But ascertaining whether or not there is a positive cyclical trend has become especially difficult for two reasons. One reason is that we’re now in a period where year-over-year comparisons are worse than useless. They are highly misleading. For example, people in this room know that, if I were to say that during the most recent reserve settlement period ending on September 18 there was a 47 percent drop in nonborrowed reserves from a year earlier, all of you would know that that is useless information. Of course there was, and we know why. But comparing a period with the same period a year earlier is the way a lot of data such as retail sales, corporate earnings, and so forth are reported. That is not going to tell us anything, and it may mislead a lot of people. For example, when we get the October car sales figures, the headline number is going to be reported as the biggest monthly drop in the history of the series. That’s pretty useless information.

Secular trends also are hard for people to filter out. When the August employment figures were released, our directors concluded that the continued weakness in manufacturing employment suggested that the expansion was not on firm ground. But manufacturing employment was weak throughout most of the ten-year long expansion of the 1990s. At the end of that expansion, 24 million more people were working than at the end of the prior expansion, but manufacturing employment was down 370,000 on balance over the ten-year period. And even if one assigns a significant share of the help supply employment to manufacturing, it was still a weak performance. Breaking it down, durable goods employment was reported to have risen 300,000 over the ten years while nondurable goods manufacturing fell by 670,000 over a decade of economic boom. And that’s probably an understatement. The chairman of our board also sits on the board of Hamilton Beach, which I assume still has an SIC code of a small manufacturer of appliances. But Hamilton Beach has not made any investment in any facility that manufactures anything in over a decade. All the items that are sitting on the shelves of Wal-Mart with a Hamilton Beach label on them are bought from contract manufacturers someplace in the world.

The point is that there are powerful secular trends stemming from this continuous globalization of the economy that are altering the profile of our national economy. They were doing so before the cyclical contraction, and they will continue to do so during an economic upturn. In fact, these forces are just as likely to strengthen as to abate during a cyclical upturn. We will have to look elsewhere for confirmation of any kind of positive bias to the pattern of the saw teeth.

Finally, regarding Dave Stockton’s opening comments: If a year ago at this time Dave had not only anticipated the subsequent shocks but then went on to forecast accurately what actually has happened over these past twelve months, I suspect it would have seemed simply not credible, even given our post-September 11 policy actions. The point is that the U.S. economy over these past twelve months has performed much, much better than anyone had any reasonable right to expect, which is a testament to the inherent resiliency of a market economy. And that’s very important to keep in mind. Thank you.

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