Regional President Speech

SILAS KEEHN REMARKS THE PRESIDENTS FORUM ROLLING MEADOWS, IL JULY 16, 1986 I. ECONOMIC OUTLOOK A. REMINDER -- AT THE OUTSET OF THE YEAR 1. THE CONSENSUS - MODEST GROWTH FIRST HALF 2. SIGNIFICANT IMPROVEMENT SECOND HALF - JULY 1ST HAS COME AND GONE B. THE NECESSARY INGREDIENTS TO PRODUCE THE EXPECTED IMPROVEMENT - AND I'LL EXPAND ON EACH IN A MINUTE 1. LOWER INTEREST RATES 2. SIGNIFICANT REDUCTION IN ENERGY VALUES - FAVORABLE FOR THE INFLATIONARY OUTLOOK - FAVORABLE FOR PERSONAL INCOME 3. LOWER EXCHANGE VALUE OF THE DOLLAR C. THE EXPECTED RESULT - NO EFFECT FROM THESE INGREDIENTS - 1 1+ Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis PRESIDENTS FORUM 7/16/86 PAGE 2 1. EVERYONE ANTICIPATED A VERY SOFT SECOND QUARTER - WILL KNOW MORE ABOUT THAT NEXT WEEK 2. THE ANTICIPATION WAS FOR REAL GROWTH OF, SAY, 4% IN THE THIRD AND FOURTH QUARTERS 3. AND THAT FOR THE YEAR AS A WHOLE, ON A 4TH QUARTER TO 4TH QUARTER BASIS, 3-1/2% A. EXACT NUMBER NOT AS IMPORTANT AS IMPROVEMENT FROM LAST YEAR (2.1% 4Q) II. LET ME ELABORATE ON THE INGREDIENTS A. INTEREST RATES - MEDIUM AND LONG TERM RATES DOWN BY SOME 400 BASIS POINTS OVER THE LAST 12 TO 15 MONTHS 1. THIS HAS HAD A POSITIVE EFFECT ON THOSE SECTORS SO SENSITIVE TO INTEREST RATES 2. AUTOMOBILE SALES LAST YEAR A LITTLE OVER 11 MILLION UNITS 3. THOUGH OFF SOMEWHAT THIS YEAR, STILL AT A COMPARATIVELY HIGH LEVEL Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis PRESIDENTS FORUM 7/16/86 PAGE 3 4. MORTGAGE FINANCING AND RE-FINANCING HAS BEEN AT ASTOUNDING HIGH LEVELS A. INDEED, PROCESSING IS THE PROBLEM AND MORTGAGE RATES HAVE BEEN INCREASED TO TRY AND STEM APPLICATIONS 5. THE DECREASED MONTHLY MORTGAGE PAYMENT BETWEEN A 13% AND A 10% LOAN - SIGNIFICANT EFFECT ON DISPOSABLE PERSONAL INCOME 6. TO EMPHASIZE THE POINT, REDUCED INTEREST RATES HAVE HAD AND CONTINUE TO HAVE A VERY POSITIVE EFFECT ON CONSUMER SPEND I NG - THAT S NOT THE I PROBLEM A. INDEED, IF ANYTHING, IT'S A WORRY - CAN THESE TRENDS POSSIBLY BE SUSTAINABLE? B. THE EXCHANGE VALUE OF THE DOLLAR - A DECLINE OF SOME 33% AGAINST THE DOLLAR AND THE YEN 1. WE ALL UNDERSTOOD THE CURVE UJU Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis PRESIDENTS FORUM 7/16/86 PAGE 4 A. BUT THE DEPTH AND THE BREADTH OF THE BOTTOM OF THE LETTER SEEM MUCH GREATER THAN WE WOULD HAVE EXPECTED B. THE PEAK IN THE VALUE OF THE DOLLAR WAS REACHED IN FEBRUARY 1985 - ALMOST 18 MONTHS AGO 2. BY NOW WE SHOULD BE SEEING SOME IMPROVEMENT - AND SOME INDUSTRIES DO HAVE HIGHER LEVELS OF EXPORT SALES - PAPERBOARD 3. BUT BY AND LARGE, EXPORT SALES OF OTHER INDUSTRIES HAVE NOT PICKED UP 4. THE ECONOMIES OF OUR MAJOR TRADING PARTNERS ARE NOT IMPROVING A. EARL I ER TH IS YEAR WE EXPECTED THAT THE JAPANESE AND GERMAN ECONOMIES WOULD BE GROWING AT RATES MORE RAPID THAN ARE HERE Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis PRESIDENTS FORUM 7/16/86 PAGE 5 B. JUST THE OPPOSITE IS THE CASE - THE MARKETS FOR OUR EXPORT PRODUCTS HAVE DETERIORATED AND ARE NOT PROVIDING AN OPPORTUNITY FOR INCREASED SALES VOLUME 5. MOREOVER, THE EXCHANGE VALUE OF THE DOLLAR HAS NOT DECLINED MUCH OR AT ALL WI TH SOME OF OUR TRADING NATIONS WHO MIGHT BE CUSTOMERS FOR OUR PRODUCTS A. CANADA - OUR GREATEST TRADING PARTNER - A PRIME EXAMPLE B. ALSO TRUE OF KOREA, HONG KONG AND MANY OTHER COUNTRIES THAT, IN ESSENCE, PEG THEIR CURRENCIES OFF OF THE DOLLAR (1) FOR MANY PRODUCTS THAT ARE IMPORTED INTO THE U.S. - PRODUCTION IS MERELY SHIFTING FROM JAPAN TO KOREA 6. THIS HAS BEEN AN ENORMOUS CHANGE IN THE OUTLOOK Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis PRESIDENTS FORUM 7/16/86 PAGE 6 A. THE SECOND HALF GROWTH THAT I EARLIER NOTED TO SOME SIGNIFICANT EXTENT DEPENDENT ON A PICKUP IN PRODUCTION SUPPORTING HIGHER LEVELS OF EXPORT SALES B. IT ISN'T OCCURRING C. HARDLY REALISTIC TO EXPECT CONSUMER SPENDING TO PICK UP THE SLACK D. AS I HAVE NOTED, IT IS ALREADY AT A VERY HIGH LEVEL E. THE CONSUMER JUST CAN'T DO IT ALL 7. THE MONETARY/FISCAL POLICIES OF OUR MAJOR TRADING PARTNERS (CERTAINLY JAPAN AND GERMANY) BECOME CRITICALLY IMPORTANT A. THIS WAS IMPLICIT IN OUR REDUCTION OF THE DISCOUNT RATE LAST WEEK Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis PRESIDENTS FORUM 7/16/86 PAGE 7 B. IF WE DON'T GET APPROPRIATE RESPONSES IN EITHER OR BOTH OF THOSE COUNTR !ES - THE IMPLICATIONS FOR OUR ECONOMY BECOME APPARENT 8. ALL OF THIS, OF COURSE, DRAMATIZES THE GLOBALIZATION OF THE WORLD ECONOMIES C. LOWER ENERGY PRICES 1. ENORMOUSLY HELPFUL FROM THE PERSPECTIVE OF INFLATION 2. ALSO A BOOST TO PERSONAL DISPOSABLE INCOME - CONSUMPTION 3. FELL FROM THE SKY - GLASS 7/8THS FULL 4. BUT THE RAMIFICATION FOR SOME PARTS OF OUR COUNTRY AND OUR ECONOMY PRETTY DRACONIAN A. SOUTHWEST - HAS BEEN A PARTICULARLY STRONG ECONOMIC REGION OVER THE RECENT YEARS Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis PRESIDENTS FORUM 7/16/86 PAGE 8 B. TO HAVE THIS TURN AROUND SO TREMENDOUSLY IS HAVING AN EFFECT ON THE NATIONAL FIGURES - PARTICULARLY CAPITAL SPENDING WHICH ON A NATIONAL BASIS HAS NOW FLATTENED OUT 5. AND THERE ARE SOME SIGNIFICANT INTERNATIONAL EFFECTS AS WELL - MEXICO A. GIVEN THE IMPACT OF THE LOWER OF THEIR MAJOR EXPORT ITEM - THEIR ABILITY TO PURCHASE OUR PRODUCTS IS REDUCED B. AND THEIR FINANCIAL POSITION IS A CONSTANT OVERHANG IN THE MARKETS I I I. AND THERE ARE SOME OTHER RECENT CHANGES THAT ARE IMPACTING THE OUTLOOK FOR THE ECONOMY A. THE FISCAL DEFICIT - IT HAS BEEN A WORRY THROUGHOUT l. BUT GRAMM-RUDMAN AT LEAST HAD AN ILLUSORY ASPIRIN EFFECT Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis PRESIDENTS FORUM 7/16/86 PAGE 9 2. WE KNEW THAT IT DI DN I T SOLVE THE PROBLEM BUT THERE CERTAINLY WAS THE ANTICIPATION THAT IT WOULD AT LEAST MECHANICALLY LEAD CONGRESS TO TAKE THE NECESSARY STEPS. 3. THE SUPREME COURT DECISION, THOUGH NOT IN ANY WAY A SURPRISE, NONETHELESS DOES MAKE IT ABSOLUTELY CRYSTAL CLEAR THAT THE DEFICIT PROBLEM IS BACK WI TH US AND CONGRESS HAS LESS THAN 45 WORKING DAYS LEFT TO DEAL WITH THE 1987 BUDGET BEFORE ADJOURNING TO DEAL WITH CONGRESSIONAL AND SENATORIAL RACES A. THIS IS HAVING AN ADVERSE EFFECT IN THE MARKETS B. THIS ISSUE DOESN'T GO AWAY - AND IT WON'T UNTIL THE APPROPRIATE ACTION IS TAKEN C. ANNOUNCEMENT YESTERDAY BY 0.M.B. THAT FISCAL 1986 DEFICIT WILL REACH A RECORD $220 BILLION Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis PRESIDENTS FORUM 7/16/86 PAGE 10 B. ANOTHER ISSUE THAT IS LOOMING LARGER - THE TAX BILL 1. CERTAINLY THE SENTIMENT OF THE COUNTRY IS FOR TAX REFORM 2. THE JOINT CONFERENCE COMMITTEE WILL BEGIN THEIR DELIBERATIONS SHORTLY 3. IN THE INTEREST OF PROVIDING DISCERNIBLE BENEFITS FOR THE CONSUMER - AND IT'S AN ELECTION YEAR - THERE IS A RISK THAT THE TAX BURDEN WILL BE SHIFTED FROM THE CONSUMER TO THE CORPORATION 4. ULTIMATELY, THAT ENDS UP BACK IN THE LAPS OF THE CONSUMER THROUGH HIGHER PRICES 5. THERE IS A GROWING FEELING THAT THIS TAX REFORM WILL END UP BEING ANTI-BUSINESS AND THAT, TOO, IS UNSET TL I NG THE MARKE TS AND MAY HAVE AN ADVERSE EFFECT ON THE ECONOMIC OUTLOOK 6. PERHAPS NOT SO MUCH THIS YEAR AS NEXT YEAR - THE INTRODUCTION OF THE CHANGES ON A STAGGERED BASIS Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis PRESIDENTS FORUM 7/16/86 PAGE 11 IV. BUT LET'S NOT GET TOO GLOOMY HERE A. WE ARE CONT I NU I NG TO EXPERIENCE A VERY POSIT I VE ECONOMIC CYCLE 1. WE ARE NOW WELL THROUGH THE FOURTH YEAR OF THE ECONOMIC EXPANSION 2. COMPARATIVELY THIS HAS BEEN A VERY POSITIVE CYCLE - ONE OF THE THREE LONGEST SINCE WORLD WAR II B. EMPLOYMENT HAS BEEN VERY STRONG - ONE OF THE MOST SIGNIFICANT ASPECTS OF THIS CYCLE 1. TOTAL EMPLOYMENT UP OVER 8 MILLION JOBS SINCE THE LAST PEAK - OVER 11 MILLION JOBS SINCE THE 1982 TROUGH 2. NOW HAVE SOME 100 MILLION INDIVIDUALS IN THE PAYROLL POOL IN THIS COUNTRY - PRETTY IMPRESSIVE 3. UNEMPLOYMENT HIGHER THAN WE WOULD LIKE BUT THERE HAVE BEEN SOME MITIGATING DEMOGRAPHIC CIRCUMSTANCES Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis PRESIDENTS FORUM 7/16/86 PAGE 12 4. TO EMPHASIZE THE POSIT I VE, PERHAPS REPETITIVELY SO, EMPLOYMENT HAS BEEN STRONG - WE HAVE BEEN ADDING AN AVERAGE OF SOME 250-TO 260,000 TO THE PAYROLLS PER MONTH AND UP UNTIL LAST MONTH WE HAD HAD 33 CONSECUTIVE MONTHS OF INCREASES IN PAYROLL EMPLOYMENT C. REAL GNP GROWTH SOME 10% ABOVE THE PRIOR PEAK (1982 DOLLARS) D. CAPITAL SPENDING - LARGEST INCREASE OF ANY POST WORLD WAR II CYCLE 1. ADMITTEDLY NOT FOR EXPANSION PURPOSES 2. ORIENTED TOWARD PRODUCTIVITY/EFFICIENCY 3. POSITIVE OUTLOOK FOR ABILITY TO COMPETE IN WORLDWIDE MARKETS 4. EXPECTATIONS FOR THIS YEAR FLATTENING OUT E. AND PERHAPS EVEN MORE SURPRISING, INDUSTRIAL PRODUCTION SOME 11% ABOVE THE PRIOR PEAK Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis PRESIDENTS FORUM 7/16/86 PAGE 13 l. WE KEEP READING ABOUT THE SERVICE ECONOMY - AND THERE HAS BEEN A SHIFT 2. BUT INDUSTRIAL PRODUCTION HAS ALSO GROWN 3. EMPLOYMENT IN MANUFACTURING HAS DECLINED BUT, AS I SAID, INDUSTRIAL PRODUCTION HAS INCREASED 4. CLEARLY, MANUFACTURING AMERICA HAS MODERNIZED AND DEALT WITH EFFICIENCY AND PRODUCTIVITY IN AN AGGRESSIVE WAY 5. AND, AGAIN, THIS WILL BODE WELL FOR OUR FUTURE COMPETITIVENESS F. CERTAINLY THE PACE OF GROWTH IS A DISAPPOINTMENT TO MANY - THE ADMINISTRATION HAS BEEN FORECASTING A HIGHER LEVEL OF ECONOMIC PERFORMANCE AND THIS HAS BEEN KEY TO THEIR REVENUE PROJECTIONS 1. ON AN ANNUAL BASIS, WE HAVE BEEN RUNNING AT A GROWTH RATE OF ABOUT +2% FOR THE PAST FOUR QUARTERS Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis PRESIDENTS FORUM 7/16/86 PAGE 14 2. THAT IS BELOW WHAT USED TO BE CONSIDERED OUR LONG TERM POTENTIAL GROWTH TREND+ 3% 3. THIS IS ONE OF THE VERY DIFFICULT ECONOMIC IMPONDERABLES - HAS OUR GROWTH POTENTIAL DECLINED - A DECLINE WOULD BE CONSISTENT WITH DECLINES IN THE GROWTH POTENTIAL THAT WE HAVE EXPERIENCED SINCE WORLD WAR II 4. WHEN YOU PUSH THE ECONOMY OVER THE POTENT I AL - WATCH OUT - INFLATION V. WHILE THE CHARACTERISTICS OF THIS ECONOMIC CYCLE HAVE BEEN POSITIVE IN A BROAD NATIONAL (INDEED, INTERNATIONAL) PERSPECTIVE A. IT HAS CERTAINLY BEEN A VERY UNEVEN PERFORMANCE 1. PARTICULARLY TRUE HERE IN THE MIDWEST WITH SO MANY INDUSTRIES THAT HAVE BEEN SO HARD HIT Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis PRESIDENTS FORUM 7/16/86 PAGE 15 2. AGRICULTURE - HEAVY CAPITAL GOODS - EXPORTING INDUSTRIES - THOSE AFFECTED BY HIGH VOLUME OF IMPORTS (AUTOMOTIVE) 3. CONSTRUCTION SPENDING - VERY STRONG NATIONALLY - SURPRISINGLY STRONG IN THE MIDWEST, PARTICULARLY THE CHICAGO METROPOLITAN AREA A. HOUSING STARTS ARE PART OF THE MIDWEST - UP 24% FOR THE FIRST FIVE MONTHS OF THIS YEAR VERSUS LAST B. HOUSING STARTS IN ILLINOIS, THE SAME PERIOD, UP 57% - THE LARGEST INCREASE OF ANY STATE IN THE U.S. C. IN THE CHICAGO AREA IN MAY RESIDENTIAL CONSTRUCTION CONTRACTS WERE UP SOME 80% OVER LAST YEAR D. IN NON-RESIDENTIAL CONSTRUCTION A SIMILAR, THOUGH ADMITTEDLY MORE MODEST, TREND Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis PRESIDENTS FORUM 7/16/86 PAGE 16 E. FOR THE FIRST FIVE MONTHS OF THIS YEAR IN THE DISTRICT, NON-RESIDENTIAL FLOOR AREA INCREASED 5% AND IN ILLINOIS THE NUMBER WAS 4% F. DESPITE WHAT SEEMS LIKE A DIZZYING ARRAY OF NEW OFFICE BUILDINGS THAT ARE UNDER CONSTRUCTION, I AM TOLD THAT SOME 14 MILLION SQUARE FEET OF NEW OFFICE BUILDINGS HAVE BEEN COMMITTED AND WILL GET UNDERWAY IN THE NEAR FUTURE B. MANY OF THE CHANGES ARE NOT JUST CYCLICAL - THEY HAVE A VERY SECULAR CHARACTERISTIC 1. MANY OF OUR INDUSTRIES HAVE LOST THEIR POSITIONS TO INTERNATIONAL COMPETITORS AND WI LL PROBABLY NEVER EVER RECOVER THE POSITIONS THAT THEY FORMERLY HELD 2. AUTOMOTIVE/STEEL - JUST TWO OBVIOUS EXAMPLES OF THIS Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis PRESIDENTS FORUM 7/16/86 PAGE 17 3. AGRICULTURE - ALMOST UNBELIEVABLY WE WERE A NET IMPORTER OF AGRICULTURAL PRODUCTS IN MAY A. SIMPLY ASTONISHING, BUT THE WORLDWIDE AGRICULTURAL PRODUCTIVE SITUATION HAS TOTALLY CHANGED - COUNTRIES THAT HERETOFORE WERE MAJOR IMPORTERS ARE NOW SELF-SUFFICIENT AND IN SOME CASES HAVE BECOME EXPORTERS C. WE MAY BE APPROACHING OUR CURRENT SITUATION WITH THE PERSPECTIVE LEARNED FROM PRIOR EXPERIENCE - BUT SOMEHOW SOMETHING SEEMS VERY DIFFERENT 1. LET ME USE INFLATION AS AN EXAMPLE OF WHAT I MEAN D. THIS IS PERHAPS THE CRITICAL ISSUE l. ARE WE FACING THE RISK OF RENEWED INFLATION, OR DIS-INFLATION, OR PERHAPS DE-FLATION 2. CENTRAL BANKERS TEND TO HAVE AN INHERENTLY UNCOMFORTABLE FEELING THAT INFLATION CAN ONLY GET WORSE Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis PRESIDENTS FORUM 7/16/86 PAGE 18 A. THAT WE ARE IN A SOCIETY THAT IS SOCIALLY/POLITICALLY DRIVEN BY HIGHER LEVELS OF INFLATION B. WE VE BEEN THERE BEFORE - LATE 197OS - I CORRECTIVE PROCESS RATHER EXCRUCIATING C. WITH THIS KIND OF BIAS, WE WILL TEND TO BE RATHER RESTRICTIVE IN -OUR APPROACH TO MONETARY POLICY D. THE CURRENT GERMAN ATTITUDE PERHAPS THE CLASSIC EXAMPLE OF WHAT I MEAN E. BUT ALTERNATIVELY, THERE ARE SOME PERSUASIVE REASONS THAT INFLATION MIGHT NOT POSE THE RISK THAT OUR INSTINCTS MIGHT SUGGEST 1. AGAIN, WE ARE WELL INTO THE FOURTH YEAR OF THIS ECONOMIC CYCLE - HISTORY OF PRIOR CYCLES WOULD SUGGEST THAT INFLATION WOULD BE UNDER MUCH GREATER PRESSURE BY THIS TIME Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis PRESIDENTS FORUM 7/16/86 PAGE 19 2. OPERATING RATES IN OUR MANUFACTURING SECTOR ARE UNDER 80% - FOR MANY OF THE REASONS THAT I HAVE ALREADY SUGGESTED - PRICE INCREASES JUST WON IT STICK IN THE FULL SENSE - MARKET CONDITIONS ARE INTENSE 3. LABOR CIRCUMSTANCES HAVE CHANGED SIGNIFICANTLY 4. THE UNION ATTITUDE IN THE NEGOTIATION PROCESS IS QUITE DIFFERENT THAN WAS THE CASE IN THE 70S 1 WHEN WE WERE DEAL I NG WI TH SUCH HIGH RATES OF INFLATION A. 3-YEAR CONTRACTS - ±3% - SIGNIFICANT WORK RULE CHANGES - UNIT LABOR COSTS (l} INCREASES SCALE DOWN IN 2ND/3RD YEARS F. COMMODITY PRICES ARE UNDER SIGNIFICANT PRESSURE 1. WHILE IN THE LATE 70S THERE WAS THE EXPECTATION 1 THAT SOME OF OUR MAJOR COMMODITIES WOULD BE IN SHORT SUPPLY BY THIS TIME Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis PRESIDENTS FORUM 7/16/86 PAGE 20 2. OIL, AGRICULTURE, BASIC METALS 3. JUST THE OPPOSITE IS THE CASE - WE ARE DEALING WITH SURPLUSES NOT SHORTAGES 4. DEREGULATED MARKETS DO PRODUCE AMAZING RESULTS G. THIS INFLATION ISSUE IS ONE OF THE MAJOR QUANDARIES FACING THE FED IN ITS POLICY DECISIONS 1. WE WON'T HAVE THE ANSWER UNTIL IT IS TOO LATE - LAG TIME 2. CONSEQUENCES ARE ENORMOUS VI. THE ECONOMIC OUTLOOK FOR THE REST OF THIS YEAR AND FOR 1987 A. DESPITE WHAT MAY SEEM LIKE A BEARISH TONE - DON'T TAKE IT OUT OF PERSPECTIVE - THE OUTLOOK IS STILL POSITIVE - IT'S ONLY A QUESTION OF DEGREE 1. OUR EXPECTATION IS THAT THE ECONOMIC EXPANSION WILL CONTINUE FOR THE BALANCE OF THIS YEAR AND Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis PRESIDENTS FORUM 7/16/86 PAGE 21 FOR NEXT - WITH USUAL CAVEATS - NO SIGN OF RECESSION 2. REAL GROWTH THIS YEAR ON A 4TH QUARTER TO 4TH QUARTER BASIS 3% OR A LITTLE UNDER, AND WE WOULD ANTICIPATE SIMILAR GROWTH FOR NEXT YEAR ON A 4TH QUARTER TO 4TH QUARTER BASIS 3. HOUSING STARTS THIS YEAR SHOULD COME IN AT BETWEEN 1.8 MILLION AND 1.9 MILLION UNITS AND ONLY SLIGHTLY LOWER NEXT YEAR, SAY, 1.7 MILLION UNITS - IF THIS WORKS OUT AS FORECASTED, NEXT YEAR WILL BE THE FIFTH CONSECUTIVE YEAR IN WHICH WE WILL HAVE HAD HOUSING STARTES AT OVER 1.7 MILLION UNITS 4. CARS - I NOTED EARLIER THAT CAR SALES THIS YEAR WOULD COME IN AT 10.6 OR 10.7 MILLION UNITS - NEXT YEAR'S LEVEL SHOULD BE QUITE CLOSE TO THAT Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis PRESIDENTS FORUM 7/16/86 PAGE 22 AND, AGAIN, IF REALITY MEETS EXPECTATION, WE WILL HAVE HAD FOUR CONSECUTIVE YEARS WITH AUTO SALES OF OVER 10 MILLION 5. I COULD GO THROUGH A WHOLE LIST OF OTHER ECONOMIC STATISTICS - THE MESSAGE WOULD BE SIMILAR - CONTINUED POSITIVE GROWTH THROUGHOUT THE SPECTRUM 6. THE FRUSTRATION - WE ARE A SOCIETY THAT HAS COME 10 LIKE AND TO EXPECT EVER INCREASING LEVELS OF ECONOMIC PERFORMANCE 7. IT'S JUST NOT REALISTIC VI I. BUT WHAT CAN UPSET TH IS POSIT I VE ( THOUGH CERTAINLY NOT EXPLOSIVE) OUTLOOK - THE IMBALANCES A. THE COMMON DENOMINATOR, THE INCREASE IN DEBT 1. ACROSS ALL SECTORS OF OUR ECONOMY - PUBLIC AS WELL AS PRIVATE Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis PRESIDENTS FORUM 7/16/86 PAGE 23 A. THE GREATEST INCREASE IN DOMESTIC NONFINANCIAL DEBT THAT WE HAVE EXPERIENCED IN OVER 30 YEARS - CONSUMER - CORPORATE - GOVERNMENTAL 2. THE FEDERAL BUDGET DEFICIT - I HAVE ALREADY COMMENTED ON THE DEFICIT ISSUE A. FEDERAL BUDGET DEFICITS OF CURRENT MAGNITUDES AT THIS STAGE OF THE ECONOMIC CYCLE ARE UNPRECEDENTED (1) NOT AT ALL UNUSUAL DURING A RECESSION OR SOME OTHER ADVERSE EVENT (2) AGAIN, WE ARE WELL INTO THE FOURTH YEAR OF AN ECONOMIC EXPANSION AND ARE CONTINUING TO RUN DEFICITS AROUND 4-1/2 TO 5% OF THE GNP - WE'VE NEVER DONE THIS BEFORE Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis PRESIDENTS FORUM 7/16/86 PAGE 24 ( 3) IN THE LONG HI STORY OF OUR COUNTRY WE HAVE ALWAYS MANAGED TO BRING OUR BUDGETS BACK INTO BALANCE - THE HISTORY B. DEFICITS RESULT IN DEBT C. THE TREASURY DEBT LOAD - SIMPLY EXPLODED ( 1) THE OUTSTANDING TREASURY DEBT WENT TO $500 BILLION IN 1975 (2) A STATISTICAL FACT - WE PIERCED THE 2-TRILLION DOLLAR LEVEL ON APRIL FOOL'S DAY OF THIS YEAR (A) WE WILL SHORTLY HIT THE CURRENT ALLOWABLE DEBT CEILING AND CONGRESS WILL ONCE AGAIN GO THROUGH THE RITUALISTIC DANCE TO RAISE THE LEVEL I WON'T BELABOR THE OBVIOUS - THIS IS (3) SIMPLY UNSUSTAINABLE Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis PRESIDENTS FORUM 7/16/86 PAGE 25 (A) INTEREST ON THE DEBT IS CONSUMING AN EVER LARGER PORT ION OF THE FEDERAL BUDGET - UP FROM 10% OF THE BUDGET IN 1976 TO A CURRENT LEVEL THAT APPROACHES 20% - THE COMPOUND INTEREST SYNDROME AT WORK ( B) THE WHOLE ISSUE - THE ALLOCATION OF OUR NET AVAILABLE SAVINGS BETWEEN THE PRIVATE SECTOR, WHICH INVESTS THESE FUNDS IN A WHOLE HOST OF PRODUCTIVE INVESTMENTS, VERSUS THE PUBLIC SECTOR WITH ITS DEB IL IT AT I NG CONSEQUENCES - VERY MAJOR SOCIAL/POLITICAL ISSUE (4) IN MY VIEW, IF THIS IS NOT DEALT WITH, IT REALLY COULD PUSH OUR ECONOMIC EXPANSION OFF THE RAILS Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis PRESIDENTS FORUM 7/16/86 PAGE 26 3. EXTERNAL DEBTS OF THE LESSER DEVELOPED COUNTRIES A. SIGNIFICANT IMPROVEMENT IN 1983 AND 1984 - AFTER THE SUMMER OF 1982 CRISES B. AND SOME COUNTRIES ARE CONT I NU I NG TO SHOW PROGRESS AIDED BY THE LOWER COST OF IMPORTED ENERGY C. THEIR ABILITY TO EXPORT PRODUCTS INTO THE U.S. MARKETS D. BUT OTHERS HAVE BEEN PRETTY ADVERSELY AFFECTED - MEXICO, THE VERY OBVIOUS EXAMPLE B. FINANCIAL SYSTEM STRESS - THE MARKE TS HAVE BEEN SMACKED PRETTY RE CURR I NGL Y BY FINANCIAL I NC I DENTS OVER THE PAST FEW YEARS 1. THRIFTS 2. GOVERNMENT SECURITIES DEALERS 3. BANK CLOSURES - MAY WELL REACH 150 THIS YEAR Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis PRESIDENTS FORUM 7/16/86 PAGE 27 A. LARGE OKLAHOMA INSTITUTION DEALT WITH EARLIER THIS WEEK 4. SO FAR THE REGULATORS HAVE BEEN ABLE TO COPE - THE RECORD IS GOOD - I HAVE EVERY CONFIDENCE THAT WE WILL CONTINUE A. BUT THERE IS ALWAYS THE RISK THAT ONE MIGHT GET AWAY FROM US C. PERHAPS THE LARGEST CHANGE THAT HAS OCCURRED OVER THE PAST DECADE - OUR GREATEST CHALLENGE - BUT PERHAPS ALSO OUR GREATEST OPPORTUNITY - THE GLOBALIZATION OF THE WORLDWIDE ECONOMIC SYSTEM 1. QUITE CLEAR THAT WE ARE NO LONGER SEPARATE ECONOMIES OPERATING AUTONOMOUSLY 2. THE BARRIERS HAVE COME DOWN - WITH MINOR INHIBITIONS WE ARE OPERATING IN ECONOMIES THAT HAVE A PRETTY FREE INTERFLOW OF CAPITAL AND GOODS Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis PRESIDENTS FORUM 7/16/86 PAGE 28 3. INDEED, THE FLOW OF CAPITAL HAS NOW SURPASSED THE FLOW OF GOODS - NO LONGER ARE THE CAPITAL MOVEMENTS SIMPLY UNDERPINNING THE RELATED PRODUCT TRANSACTIONS A. A PHENOMENAL CHANGE - EXCITING - YET THE VELOCITY AND MAGNITUDE OF THE MOVEMENTS IS MORE THAN A LITTLE UNNERVING 4. THE INTERNATIONALIZATION OF SOME OF OUR BASIC INDUSTRIES E.G. AUTOMOBILE A. OUT-SOURCING TO THE LOWEST COST PRODUCT I ON POINTS AVAILABLE B. THE MANUFACTURE AND ASSEMPLY OF TODAY'S CAR EASILY ROLLS THROUGH POLITICAL BARRIERS 5. ALL OF THIS POSES SOME PRETTY SIGNIFICANT SOC I 0/POL IT I CAL QUESTIONS THAT LEGISLATORS AND REGULATORS ARE GRAPPLING WITH Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis PRESIDENTS FORUM 7/16/86 PAGE 29 A. CAN WE BE SOCIETALLY COMFORTABLE WITH THE IMPLICATIONS OF ALL THIS - VERY SIMPLY, THE EXPORT OF PRODUCT I VE JOBS INTO LOWER COST AREAS - FAR EAST, CENTRAL AND SOUTH AMERICA, ET AL 8. CAN OUR LABOR FORCE ADJUST TO THESE SIGNIFICANT CHANGES - AS WE INCREASINGLY SHIFT TO A SERVICE BASED SOCIETY {AND I'M NOT JUST TALKING ABOUT HOT DOG STANDS AND DRY CLEANING ESTABLISHMENTS) C. A GULF WILL EMERGE BETWEEN OUR LESSER TALENTED, PERHAPS UNEMPLOYABLE, POPULATION AND THOSE WHO HAVE AND ARE MAKING THE ADJUSTMENT - DEEP PHILOSOPHICAL ISSUES THESE 6. CAN WE COORDINATE THE FISCAL/MONETARY POLICIES OF THE MAJOR INTERNATIONAL ECONOMIES Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis PRESIDENTS FORUM 7/16/86 PAGE 30 A. THE TOKYO SUMMIT CALLED FOR GREATER COORDINATION OF OUR POLICIES B. IF THE TRENDS THAT I' VE EARL I ER NOTED CONTINUE, COORDINATION WILL BECOME INCREDIBLY IMPORTANT C. BUT WE ARE TALK I NG ABOUT SOVEREIGN TURF - PRIOR EXAMPLES OF TRYING TO MAKE THIS WORK ARE NOT ALL THAT ENCOURAGING VI I I. CONCLUSION. WHILE THE BROAD OUTLOOK CONT I NUES TO BE POSITIVE DESPITE SOME PRETTY SIGNIFICANT CHALLENGES A. ON A NEAR TERM BASIS SOME OF THESE ISSUES THAT I'VE TOUCHED ON LOOM PRETTY LARGE 1. THE CRITICAL ISSUE - MAINTAINING THE ECONOMIC EXPANSION 2. FALLING BACK INTO A RECESSION AT THIS POINT WOULD BE MORE THAN AWKWARD Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis PRESIDENTS FORUM 7/16/86 PAGE 31 3. ALL OF THIS AT A TIME THAT OUR STANDARD MONETARY POLICY TOOLS DO NOT SEEM AS USEFUL NOW AS WAS THE CASE BEFORE A. THE NEED TO BE JUDGMENTAL IN OUR APPROACH TO MONETARY POLICY; IN A BROAD SENSE THOUGH THE RELATIONSHIP BETWEEN THE MONETARY AGGREGATES AND OUR ECONOMIC EXPERIENCE IS PROBABLY AS INEXORABLE AS IT HAS BEEN IN THE PAST B. THE RELATIONSHIP IS MUCH LOOSER THAN IT HAS BEEN C. QUALIFYING THE LOOSENESS IS THE TOUGH PART 4. THEREFORE, THIS IS A PARTICULARLY CRITICAL TIME FOR THE FED IN ITS MONETARY POLICY DELIBERATIONS 5. IF WE DO IT RIGHT - AND WE WILL - WE COULD VERY WELL CONTINUE FOR SOME TIME WITH A REWARDING ECONOMIC EXPERIENCE THANK YOU * * * * * Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis

Silas Keehn (1986, July 15). Regional President Speech. Speeches, Federal Reserve. https://whenthefedspeaks.com/doc/regional_speeche_19860716_silas_keehn

@misc{wtfs_regional_speeche_19860716_silas_keehn,
  author = {Silas Keehn},
  title = {Regional President Speech},
  year = {1986},
  month = {Jul},
  howpublished = {Speeches, Federal Reserve},
  url = {https://whenthefedspeaks.com/doc/regional_speeche_19860716_silas_keehn},
  note = {Retrieved via When the Fed Speaks corpus}
}