Regional President Speech

SILAS KEEHN REMARKS WBBM BUSINESS BREAKFAST PALMER HOUSE JANUARY 29 ,· 1987 FINANCIAL FORECASTS FOR 1987 I. tNlRODUCTION - I WAS ASKED TO COMMENl ON lHE INlERNATIONAL DEBl ISSUE A. . (RETORl DEPENDS ON TOPIC WORDING OR MODERAlOR INlRODUCTION) B. GENERAL OPENING 1. A VERY IMPORTANT AND DIFFICULT MATTER 2. BUT SHOULD BE PLACED IN PROPER PERSPECTIVE 3. WHILE COMPLEX AND TROUBLESOME, PROGRESS BEING MADE AND MANAGEABLE Q. OUTLOOK MORE POSITIVE THAN MANY PERCEIVE IT TO BE A. Cµi1:d.t~ ! II. TEND TO FOCUS ON NEGATIVE ASPECTS - NOT FULLY APPRECIATE PROGRESS THAT HAS BEEN MADE ~ NEW PROBLEM t!•• A. Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis FOR 1987 IN CURRENT CONTEXT WBBM BUSINESS 1/29/87 PAGE 2 1. EMERGED WITH DIFFICULTIES MEXICO EXPERIENCED IN SUMMER OF 1982 A. J. VERY DIFFICULT PERIOD RECORD HAS BEEN GOOD 1. IN SPITE OF REPEATED DIRE PREDICTIONS DEFAULTS - DEBTORS CARTELS - J:;'$:~;;;_··::. ;~:.)--~< ft-H ~G. eJ ~C.-\ ~tJc;;;._ - k'--~~ ' : 1-k.Y (~ A. 2. RECURRING CHALLENGES HAVE BEEN MET FOR ALMOST 5 YEARS / C. THE . MACHINERY 1. MORE IMPORTANT ROLE OF THE IMF AND WORLD BANK HAS ._._ -~ (. .• -~-. I.~ o . ..... \.,,..,, 1........\ , P , . ~. (MECHANISM FOR HANDLING) IS IN PLACE EMERGED A. EXTERNAL ELEMENT - CAN ENFORCE NEED FOR INTERNAL DISCIPLINE AND CORRECTIONS 2. ESSENTIAL COOPERATION/COORDINATION BETWEEN CENTRAL BANKS/COMMERCIAL BANKS HAS DEVELOPED A. Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis CRITICAL PART OF MACHINERY . ,.~--<---,' (, (..;; B. WBBM BUSINESS 1/29/87 PAGE 3 J ) - ( ~ ,,_.,g w ,;;£. V' ~L"-' i p .r.,.,J.L,.J\V COMMUNICATION HAS BEEN EXCELLENT - NO SURPRISES 3. HAS BEEN TESTED REPEATEDLY - IT 4. PAST RECORD SUPPORTS EXPECTATION THAT WE WILL BE WORKS ABLE TO DEAL WITH THESE ISSUES ---,:. Cv-tJZlN ~ '""--~ ~ .- / Ill. CONTINUED PROGRES~-~l SO REI AIEP Jp~)MPROV~D AND IMPROVING WORLD WIDE ECONOMIC SITUATION A. Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis WITH PASSAGE OF TIME THE ECONOMIC ENVIRONMENT WITHIN WHICH THESE ISSUES MUST BE MANAGED HAS SHOWN PROGRESS 1. IN THE MAJOR ECONOMIES OF THE WORLD, THE EXPANSION CONTINUES 2. STARTING AT HOME, EXPECTATION BY MOST FORECASTERS THAT U.S. ECONOMY WILL CONTINUE TO GROW AT MODEST YET POSITIVE PACE ·3. FORECASTS OF ECONOMIC GROWTH FOR MOST DEVELOPING COUNTRIES WHERE DEBT CONCENTRATED ARE POSITIVE IMF PROJECTIONS AS BASIS FOR COMMENT ' WBBM BUSINESS 1/29/87 PAGE 4 A. DEVELOPING COUNTRIES WITH DEBT-SERVICING PROBLEMS UP JUST UNDER 31 IN 1987 B. DEVELOP I NG COUNTRIES WI TH OUT DEBT -SERVICING PROBLEMS UP ALMOST 41 IN 1987 C. THE 15 MOST HEAVILY INDEBTED COUNTRIES UP 3-1/2% D. 4. BUT NON-OIL DEVELOPING UP ALMOST 4% EXPORT OP PORT UN IT I ES FOR THESE COUNTRIES THIS YEAR POSITIVE, SAY, 4-6% 5. BUT MORE NEGATIVELY, THOSE DEVELOP I NG COUNTRIES HEAVILY DEPENDENT ON OIL EXPORTS A. CONTINUE TO FACE DIFFICULT PROBLEMS B. PARTICULARLY IF THEY EXPERIENCE NEGATIVE ECONOMIC GROWTH THIS YEAR AND REDUCED LEVELS OF EXPORTS Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis WBBM BUSINESS 1/29/87 PAGE 5 6. UNDER THOSE DIFFICULTIES CIRCUMSTANCES, GENERATING WOULD FOREIGN CURRENCY - - - - --SERVICE DEBTS - -NlitHOI &' ---·•-=-=;...IF Tll;il 3 1 A. JC TO COUNTft¥ lN U1ft -. THIS WOULD BE PARTICULARLY TRUE IF OIL PRICES . DECLINE B. HAVE . }...,,, 1 ,1.,,..(0..--li<-1-i-J~ ~ ,.6 .... ·, ~~-~ M'J ~ ~ ~ - ",,......,-. ~ _,,_.,,,.. r - - ~ • . . • . BUT EVEN HERE, A CONTINGENCY HAS BEEN PROVIDED FOR - PROVISIONS INCLUDED IN LAST RESTRUCTURING _t _ _ )J._'1.,)t. CCV~ C. IN OT~R V..r--i 4 Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis T: l /. ~~. .MECHANISM -vv<J (..,.,c,-) -r- I IN PLACE °"TV ~~ ~ ,,-C..:... / , FROM AN EXPORT PERSPECTIVE, DECLINE OF DOLLAR HAS NOT HAD AS MUCH IMPACT ON SOME DEVELOPING COUNTRIES AS IS THE CASE WITH GERMANY AND JAPAN A. MANY DEBTORS LIKE KOREA - NOT A DEBT PROBLEM - TIED TO THE DOLLAR B. MANY OTHERS - MAJOR SOUTH AMERICAN ARE LOOSELY TIED WBBM BUSINESS 1/29/87 PAGE 6 (1) TEND TO DEVALUE (2) IN FACT, DEPRECIATED RELATIVE TO DOLLAR { 3) EXPORT POSIT IONS WON I T BE AS ADVERSELY AFFECTED AS DECLINE IN THE VALUE OF THE DOLLAR w✓v rz.-~ ,J pcr--n.:.r·o ~-- . }(·· AGAINST OTHER CURRENCIES MIGHT SUGGEST to B. WE TALK ABOUT LDC EXTERNAL DEBT ---------- Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis AS A BROAD SUGGESTING THAT THE WHOLE CATEGORY IS BAD - CATEGORY JUST NOT RIGHT 1. MANY 2. TOTAL EXTERNAL DEBTS OF DEVELOPING COUNTRIES ARE SERVICING THEIR DEBTS ON SCHEDULE SOMETHING OVER S900 BILLION 3. OF THAT TOTAL, SOME S575 BILLION INVOLVES COUNTRIES EXPERIENCING REPAYMENT DIFFICULTIES 4. BREAKING THE NUMBER DOWN FURTHER, S240 BILLION OWED BANKS WORLD WIDE, ABOUT SlOO BILLION TO U.S. BANKS WBBM BUSINESS 1/29/87 PAGE 7 5. CERTAINLY A SIGNIFICANT AMOUNT BUT LOOMS A LITTLE LESS THREATENING THAN THE LARGER NUMBER C. Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis AT SAME TIME, POSITION OF U.S. BANKS LENDING TO LDCS HAS IMPROVED 1. _ /JJt'# 5 '.:", _-l-' -h.. 11•-e..,j 7 o L t..-J <.. V1J ,;;,,...-1.._µ ~ _ _ . , / TOTAL U.S. B ~ S .'AS PERCENT OF CAPITAL FROM 2801 TO 1751 FROM 1982 TO 1986 A. BANK CAPITAL POSITIONS HAVE IMPROVED OVER \ ~~~ ~ PAST FEW YEARS-~(C--A.{~,( .r 7' ,)a-~-<-~,·~ ;;~~~-<t.i.l B. IN A BETTER RELATIVE POSITION TO DEAL WITH PROBLEM C. AND CAPITAL EXPOSURES TO BANKS TO INDIVIDUAL COUNTRY RISKS DOWN SHARPLY FROM 1982 TO 1986 (1) BRAZIL FROM ABOUT 301 OF CAPITAL TO 201 (2) MEXICO FROM ABOUT 351 TO A LITTLE OVER 201 (3) AND SIMILAR TRENDS FOR ARGENTINA, VENEZUELA, PHILIPPINES AND NIGERIA WBBM BUSINESS 1/29/87 PAGE 8 IV. DON'T WANT TO SUGGEST THIS PROBLEM BEHIND US A. MUST CONTINUE TO MAKE PROGRESS AND ACTIVELY MANAGE 1. DEPENDENT ON CONTINUED ECONOMIC GROWTH IN DEVELOPED WORLD ,·I A. SPECTER OF PROTECTIONISM VERY TROUBLESOME B. TRADE WAR EVEN IF SEEMINGLY FOCUSED ON DEVELOPED COUNTRIES OR DEVELOPING WITHOUT DEBT PROBLEMS (1) V. WOULD UNSTICK THE SITUATION CONCLUSION A. ON A NUMBER OF GROUNDS)THEN)INTERNATIONAL DEBT ISSUE DOES NOT LOOM QUITE SO LARGE 1. MECHANISM IN PLACE AND WORKING 2. ECONOMIC ENVIRONMENT FAVORABLE 3. LENDERS IN BETTER AND IMPROVING POSITION B. HOPE THESE COMMENTS WILL HELP TO PUT THIS ISSUE IN A MORE CONSTRUCTIVE PERSPECTIVE Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis • • • • • WBBM BUSINESS 1/29/87 PAGE 9 REVIEW OF PAST FEW YEARS I. HAS BEEN A GOOD ECONOMIC CYCLE - \S ~-l'- ff.~ ...J Cl~ (~~T::z-~ .• A. C. LENGTH 1. NOW IN THE FIFTH YEAR 2. COMPARATIVELY - A LONG CYCLE A. CERTAINLY VERY SERIOUS AT THE TIME B. PARTICULARLY HERE IN MIDWEST EMPLOYMENT 1. PAYROLL EMPLOYMENT OVER lOOMM FOR FIRST TIME A. TOTAL EMPLOYMENT EVEN HIGHER (.;'!/_· rt.JA~ ~ - tJ . / .,,,.,.-.---....... y-··-· ·- ·--· ~ - - - - - 2:. 8-l/2MM NEW JOBS SINCE LAST PEAK (1980) 3. ABOUT 12MM NEW JOBS SINCE BOTTOM OF RECESSION (1982) Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis • WBBM BUSINESS 1/29/87 PAGE 10 4. AVERAGE SOME 200,000-220,000 MONTHLY 5. THREE CONSECUTIVE MONTHS OF INCREASES IN MANUFACTURING SECTOR D. E. F. Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis UNEMPLOYMENT 1. 6.71 LAST MONTH 2. HIGHER THAN LIKE - NEED TO MAKE PROGRESS 3. BUT, AGAIN, EMPLOYMENT SIDE HAS BEEN POSITIVE INFLATION 1. VERY POSITIVE RESULT THIS FAR INTO CYCLE 2. LUCKY HITS - OIL/FOOD/IMPORTS 3. MAJOR ACCOMPLISHMENT INDUSTRIAL OUTPUT 1. RECORD LEVEL 2. SHIFT IN EMPLOYMENT TO SERVICES 3. BUT STILL PRODUCING MANUFACTURED PRODUCTS AT RECORD LEVELS WBBM BUSINESS 1/29/87 PAGE 11 II. SPECIFICS A. B. C. AUTOS - OVER llMM IN '86 1. EXPECT LOWER IN '87, SAY, 10.3/10.4 2. 314TH CONSECUTIVE YEAR OVER lOMM HOME BUILDING 1. ABOUT 1.8MM IN 1986 2. EXPECT 1.6-1.7 IN 1987 3. 415TH CONSECUTIVE YEAR OVER l.SMM WHEN THESE TWO ACTIVITIES ARE OPERATING AT THESE LEVELS - BASIC ECONOMY PRETTY GOOD Ill. NET - THIS HAS BEEN AND IS A BETTER ECONOMIC ENVIRONMENT THAN WE GIVE IT CREDIT FOR A. CERTAINLY VERY UNEVEN 1. GEOGRAPHIC AREAS (MIDWEST) 2. SECTORS OF MANUFACTURING) Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis ECONOMY ( AGRICULTURE, HEAVY WBBM BUSINESS 1/29/87 PAGE 12 B. NOT A NORMAL CYCLE - WE HAVE BEEN GOING THROUGH A PERIOD OF SIGNIFICANT ADJUSTMENTS 1. ESCALATING LEVELS OF INFLATION DURING LATE THE BLOW-OFF 2. 1 1 70S - 79- 1 80 SINCE THEN, HAVE EXPERIENCED DISINFLATION EVEN DEFLATION 3. 4. / J '[_,. ") Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis ,,._,/'1 5. VERY RUGGED PROCESS - H~~DLY ~N EVEN TRANSJTION. ~~ •.P,,~ 'lVVi''- ' ·r-· ou.:-~ ,.._.(-t\--U '"",,,., NOT AN EVEN STAIRCASE~R--OOR ,NTJ.R.E. ECONOMY ON (>, Ct-,, .J.. - Al~cC.c-.£,s:r;- U'Ydf~ c:.-Loi.c·,,J T~ WA¥ l:H> - .QR ON TIIE WA f DOWN .lr-f e~-,-J ~ tJ c'-b TO BELABOR THE POI NT - AGRICULTURE THE CLASSIC EXAMPLE A. LAND VALUES/COMMODITY PRICES ESCALATED ALMOST OUT OF REASON AS INFLATION ROARED UP B. BUT HAVE FALLEN PRECIPITOUSLY AS INFLATION {AND llE.RY IMPORTANTLY AS EXPECTATIONS ABOUT INFLATION) RECEDED , WBBM BUSINESS 1/29/87 PAGE 13 C. AS A CONSEQUENCE. AGRICULTURE IS EXPERIENCING A VERY TRAUMATIC ADJUSTMENT AS THEY BECOME ACCUSTOMED TO THIS NEW ENVIRONMENT t. Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis BUT IN THE BROAD CONTEXT OF THE WHOLE COUNTRY. PRICE STABILITY DO.ES. MATTER 1. THE REDUCTION LEVEL IN RATES OF INFLATION - ONE OF THE MORE SIGNIFICANT ACCOMPLISHMENTS - HAS PLACED OUR ECONOMY ON A MUCH BETTER FOOTING 2. ~ POSITIVE ASPECT OF THIS ECONOMIC CYCLE * * * * * WBBM BUSINESS 1/29/87 PAGE 14 COMMENTS RELATING JO ECONOMIC OUTLOOK I. EXPECT A CONTINUATION OF GROWTH PATTERN EXPERIENCED IN 1986 , A. MODEST BUT POSITIVE 1. B. BROAD SENSE RESULTS NOT UNLIKE LAST YEAR UNDERNEATH THAT BROAD EXPECT AT ION, SOME IMPORTANT SHIFTS - FIRST, SOME CAUTIONARY COMMENTS C. GROWTH IN CONSUMPTION WILL DECLINE 1. CONSUMER LED US OUT OF RECESSION 2. SUSTAINED US INTO EXPANSION - UJilJr.J,~,....J.t~'\---~ ~trvc~·~-G".--+ ) ~ " ' ABILITY TO MAINTAIN PACE HAS TO BE OPEN TO 3. QUESTION 4. CONSUMER INSTALLMENT DEBT AT VERY HIGH LEVEL 5. PERSONAL INCOME UNDER PRESSURE 6. CONSUMER MIGHT WELL BEGIN TO RESTRAIN EXPENDITURES D. CAPITAL SPENDING/BUSINESS INVESTMENT Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis WBBM BUSINESS 1/29/87 PAGE 15 1. UNDER PRESSURE 2. TAX BILL : I T C / ~ ~ '!J!P~ECI All ON - 3. MANUFACTURING: LOW OPERATING RATIOS. -- ,1-.-~<..,._,,.,,,e.J NO PUSH FOR CAPACITY BUT SPENDING FOR PRODUCTIVITY/EXPENSE REDUCTION WILL CONTINUE - OFFERS SOME POTENTIAL 4. OVERBUILDING IN SOME COMMERCIAL REAL ESTATE CATEGORIES - OVERDUE FOR CORRECTION E. F. GOVERNMENT SPENDING DOWN 1. FISCAL DEFICIT BEGINS TO MODERATE 2. HAS BEEN VERY STRONG STIMULUS OVER PAST FEW YEARS 3. BUT SPENDING AT STATE/LOCAL LEVEL STRONG CONSUMPTION, INVESTMENT, GOVERNMENT PURCHASE.,.._~ LOWER .l: (rufl.) II. THE AREA OF IMPROVEMENT - INTERNATIONAL TRADE A. Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis SHIFT HAS BEEN SLOW IN COMING 1. NO PROOF THAT HERE YET 2. NOVEMBER TRADE NUMBERS DISCOURAGING zv-~-, &-.;) l,J ( H -i.--~~ .1 , i...... WBBM BUSINESS 1/29/87 PAGE 16 B. BUT HAVE HAD SIGNIFICANT DECLINE IN VALUE OF DOLLAR (D.M.- 451; YEN- 401) 1. HAS TO PROVIDE BETTER TRADE OPPORTUNITY TO THOSE COUNTRIES 2. AND REDUCE IMPORTS FROM THEM AS PRICES RISE 3. ADMITTEDLY, THIS DOESN'T DEAL WITH OTHER EXPORT ING COUNTRIES WHOSE CURRENCIES HAVE NOT RISEN 4. BUT, NET, EXPECT GOOD INCREASE IN EXPORTS; REDUCTION IN RATE OF IMPORTS Ill. OUTLOOK CONTINUES TO BE POSITIVE ALBEIT MODEST A. Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis CERTAINLY UNEVEN - PARTICULARLY IN MIDWEST - MANY NOT BACK TO 1979-80 LEVELS 1. SECTORS HARD HIT IN DISINFLATIONARY PROCESS AGRICULTURE 2. EFFECT OF RISING VALUE OF DOLLAR ON EXPORTS WBBM BUSINESS 1/29/87 PAGE 17 IV. A. HEAVY MANUFACTURING B. MACHINE TOOLS C. AGRICULTURE B. CONTINUE TO GO THROUGH A DIFFICULT ADJUSTMENT PROCESS C. BUT STILL IN A BROAD SENSE OUTLOOK FAVORABLE THERE ARE SOME IMBALANCES IN THE SYSTEM A. DEBT THE COMMON DENOMINATOR 1. FISCAL DEFICIT (TRADE DEFICIT) 2. CONSUMER DEBT LEVEL 3. I '-/ B. Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis CORPORATE DEBT LEVEL - , Ji._;)-( C -•· -C • . :---: • ,..-6. .., --~ c_,,_. {'V _,I u.,:2.r. ,J IF WE MAKE PROGRESS IN CORRECTING THEM 1. WE COULD BE ESTABLISHING BASIS FOR A LENGTHY AND POSITIVE CYCLE * * * * * 

Silas Keehn (1987, January 28). Regional President Speech. Speeches, Federal Reserve. https://whenthefedspeaks.com/doc/regional_speeche_19870129_silas_keehn

@misc{wtfs_regional_speeche_19870129_silas_keehn,
  author = {Silas Keehn},
  title = {Regional President Speech},
  year = {1987},
  month = {Jan},
  howpublished = {Speeches, Federal Reserve},
  url = {https://whenthefedspeaks.com/doc/regional_speeche_19870129_silas_keehn},
  note = {Retrieved via When the Fed Speaks corpus}
}