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

Thank you, Mr. Chairman. I had absolutely no desire to speak last this morning. In fact I thought I had indicated the desire to speak early, but it seems that my presence at the table has already begun to fade! [Laughter] Had I spoken earlier about the region, right after Mike Moskow, my remarks not surprisingly would have sounded very similar to his. So at least on that score maybe it was good that I wasn’t next to speak. As for the rest of what I heard this morning, to a remarkable degree common themes ran through the commentary. Mainly, as far as I could tell by listening to all of you and based on the notes I made for myself, the go-around has really been a way for everyone to express some of the same concerns and ideas somewhat differently.

The contrast between what I’ve been hearing in the District versus reading about the national economy suggests that our region is continuing to do somewhat better than the rest of the country. Certainly, the rather panicky tone of Wall Street letters is not mirrored in the comments that I hear in the region. An article in the Wall Street Journal a few weeks ago regarding the effects of the decline in the dollar on manufacturing mentioned a couple of small Ohio companies. That prompted our research analysts to get a list of over 100 companies and their phone numbers to call. Most firms reported no increase in export orders. But the reason turned out to be that over half of all the exports coming from Ohio alone are to Canada, and another significant chunk goes to Mexico. And, of course, the Canadian dollar was only briefly higher than the U.S. dollar, and the Mexican peso has been fairly steady. For those companies that did see a pickup in orders, it reflected exports to Asia and not at all to Latin America or to Europe. A few contacts, however, said that, though their orders for exports have been steady, the profitability of their export business has been improving.

We did a roundup regarding capital spending by companies located in the District, and that produced mixed results, of course. Those increasing spending supply mainly the auto, housing, and health care sectors. Only one company cited the new tax incentives for investment as the reason for undertaking some capital investment that they had not previously planned to do. We asked them why they did it now rather than wait since the incentives will be in effect for a while. Our contact said he was quite sure that the Congress was going to remove that tax incentive after the November election.

Another topic of discussion in the District this summer has been the effects of weather. The farming region tells us that, even if normal rain were to resume now, the corn crops are wiped out. We don’t have irrigation of our corn crops in our District. And the yields of soybeans would be cut in half even if normal amounts of rainfall were to resume. That, of course, means that the ag sector lenders have big credit quality problems and are voicing a lot of concerns. We’ve heard concerns registered not only about the smaller banking companies but also about the Farm Credit Banks. It’s still too early to know who really holds the worst of these problem loans. The flip side of the effects of the dry weather is that both highway construction and theme park destinations have lost fewer days due to bad weather. Revenues at these parks so far this year have considerably exceeded expectations. We also were told that roadside restaurants and motels are operating at very high capacity levels, while central city hotels, especially in large metro areas, have very high vacancy rates. Some of that has nothing to do with recent developments in the economy. In Cincinnati, for example, a lot of conventions have been cancelled, but that has nothing to do with anything going on elsewhere. Electric power generation companies, not surprisingly, are also operating at flat-out capacity. So demand for coal has been strong, and the price of coal has been high.

Reports from the residential housing market continue to indicate a very tight market at the lower and moderate price ranges, while upper-end houses are staying on the market for ever longer periods of time. The income generated from building houses is being spent. People are buying vehicles to park in front of their houses, and the housing-related sectors, such as furniture and appliances and other items that homeowners put inside their houses, are all doing quite well. All are generating income, and that income is being spent. Meanwhile the telecom sector continues to contract. Metals companies produce more tonnage with fewer people. And the commercial and industrial construction sector continues to decline. Nevertheless, in spite of what we also are hearing—as Tom Hoenig and others reported—regarding state and local financing problems, public sector construction for schools and that sort of thing is very strong, based on bond financing.

One large employer in the region said that turnover in employment is declining because of what he described as “the fear of joining the already unemployed.” He said this is reducing employees’ resistance to the shifting of some of the sharp increases in health care costs to them. Not a very nice thing to do! At a recent small business advisory council meeting I learned that those manufacturing companies that are getting strong orders are not only using temps but also mandatory overtime rather than add permanent workers. This, of course, is contrary to the monthly report indicating reduced hours. Union contract negotiations have been reported to be settling for pay increases in the 3½ to 4 percent range.

Regarding the national economy, as always it’s a contest between the strength of forces generated by the inherent resiliency of market mechanisms versus the frequency and the strength of various adverse impulses. When asked what is causing so much caution in the business sector as well as the declared nervousness of households—an attitude not necessarily reflected in their spending—people point to three major uncertainties. And here “uncertainties” is the right word, not “risks.” Somebody else mentioned—I think it may have been Cathy—the word “fear.” I heard the word “fear” much more than the word “risk” during this recent period. There are uncertainties about where, when, and how bad the next terror attack will be, about the startling loss of confidence in the quality of balance sheet and income statements of businesses, and about when and how the violence of the Middle East can be brought to an end. None of these sources of uncertainty has a clear, easy, or near-term solution. There will not be a VT day—victory over terrorism day—that we will mark on our calendars to celebrate in the future. The credibility of financial statements will be restored only very gradually. It may be comparable to when a central bank loses the credibility of its commitment to price stability; it takes a long time to get that credibility back. And I think the business sector is going to have to wait a very long period of time before it deserves the public’s faith in the credibility of companies’ reports. Our ultimate occupation of the Middle East will last decades. People not yet born will serve in our armed forces in the Middle East.

It’s significant that neither business contacts nor economists identify monetary or fiscal policies as among the negative impulses. If there is a second downward leg of this cycle, it will be caused by new or strengthened negative impulses that are already present. The staff produces what I consider to be very useful alternative simulations of various types of risks, but these are not the things that people talk about when they are asked about their concerns and sources of uncertainty. I look forward to the staff’s forecast every September when they add that extra year and look further out into the future. Of course I don’t know what that projection is going to say, but I’ll forecast what it’s going to say. It’s going to say that on average over the subsequent eight-quarter period the economy will have growth of about 3 percent. That’s because for the last half-century, the last time I looked at the data, it has experienced about 3 percent growth. The last time I did look at the figures—and this was before the most recent revisions of the data—some 70 percent of the quarter-to-quarter changes in real GDP growth, almost three­ quarters of the observations, were below 2 percent or above 4 percent. My guess is that six out the next eight quarters of the staff forecast will not show growth below 2 percent or above 4 percent, but I bet they will average close to 3 percent.

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