Regional President Speech

-- a.r /~.,~ ata..r _....,II('__. Lf -vr rk,,I"?--' _ /.t, Irr. (p 11 SILAS KEEHN FIRST WISCONSIN NATIONAL BANK MADISON, WISCONSIN J "THE ECONOMIC OUTLOOK AND DEVELOPMENT CHALLENGES" SEPTEMBER 27, 1988 I. INTRODUCTION A. BEST OF TIMES/WORST OF TIMES II. IN THE CONTEXT OF BEST OF TIMES - START WITH A REVIEW OF OUR RECENT EXPERIENCE A. THIS HAS BEEN A LONG AND VERY REWARDING ECONOMIC CYCLE 1. COMPLETING THE SIXTH YEAR 2. LONGEST PEACE TIME RECOVERY/EXPANSION ~~l~~ B. NOT ONLY LONG BUT ALSO C'FIARACTERISf:1'.'cAbt:.Y A STRONG -~ CYCLE ~ 1. GNP - CURRENTLY CLOSE TO~ TRILLION ('INFLATION R. '-". c,. ~ ,-J, {) ADJUSTED - RECORD LEVEL 2. INDUSTRIAL PRODUCTION - RECORD LEVEL A. KEEP HEARING ABOUT OUR SHIFT TO A SERVICE ECONOMY Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis (1) WHILE EMPLOYMENT GAINS HAVE BEEN LARGELY IN SERVICE SECTOR 8. FACTORIES AND PLANTS PRODUCING PRODUCTS AT RECORD LEVELS 3. EMPLOYMENT - PERHAPS THE MOST EXCITING PART OF OUR RECENT EXPERIENCE A. TOTAL CIVILIAN EMPLOYMENT - 115 MILLION 8. FROM THE FOURTH QUARTER OF '82 AN INCREASE OF SOME 16 MILLION (1) CONTRAST WITH EUROPE AND THE FAR EAST ~ S 11.A.~l/,'o-rv C. UNEMPLOYMENT DOWN TO LEVELS, NOT SEEN SINCE 1977 (1) IN A CURRENT CONTEXT WE MAY BE AT A LEVEL OF FULL EMPLOYMENT (A) EXACT DEFINITION ELUSIVE (2) THE NEWS IS SO GOOD THAT IT'S ALMOST A WORRYING ASPECT OF OUR CURRENT SITUATION - 2 - Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis (A) SHORTAGE OF SKILLED LABOR (3) MONTHLY EMPLOYMENT INCREASES LIKE WE EXPERIENCED DURING THE SUMMER WILL BE HARDER TO ACHIEVE (A) JUNE/JULY/AUGUST - ALMOST 1 MILLION OR SOME 330,000 PER MONTH (8) IN AN EMPLOYMENT SENSE - PUSHING THE ECONOMY PRETTY HARD yu _ 4 r ~ '{- r~ ~~1 PQ.)½. 4. GROWTH IN PERSONAL CONSUMPTION DURING EARLIER PART OF CYCLE WAS UNSUSTAINABLY STRONG A. GROWTH RATES DECLINED IN '87 AND FURTHER IN 188 ( 1) NECESSARY IN TERMS OF ADJUST I NG OUR ECONOMY TO THE STRUCTURAL CHANGES 5. INDUSTRIAL CAPACITY UTILIZATION AT SOME 83% - LEVELS NOT SEEN SINCE THE LATE 1970S - PROVIDES A BASIS FOR INCREASED CAPITAL EXPENDITURES 6. DESPITE THIS STRONG GROWTH, PRICE PRESSURES NOT AS GREAT AS MIGHT HAVE EXPECTED - 3 - Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis A. CPI HAS MOVED FROM A LITTLE UNDER 2% IN 1986 TO A CURRENT LEVEL A LITTLE OVER 4% B. PPI HAS HAD INCREASES IN RAW MATERIALS AND INTERMEDIATE GOODS - MAY BE BEGINNING TO WORK THROUGH INTO INCREASED PRICES FOR FINISHED PRODUCTS (1) AGAIN NOT AS MUCH AS EXPECTED GIVEN STRENGTH OF CYCLE C. SO FAR, WAGE RATES HAVE BEEN IN CHECK (1) WHILE HOURLY EARNINGS HAVE GONE UP - GOOD WORK RULE CHANGES - PRODUCTIVITY GAINS (2) UNIT LABOR COSTS HAVE BEEN STABLE ( 3 ) C. WHILE AT THE OUTSET AND CONTINUING FOR SOME WHILE - RECOVERY PERHAPS IMBALANCED 1. MUCH LESS TRUE NOW - GROWTH MORE CONSISTENT AND MUCH EVENER - 4 - Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 2. BY ALMOST ALL MEASURES THIS HAS BEEN A REWARDING PERIOD 3. IN THAT SENSE - THE BEST OF TIMES III. LOOKING AHEAD - THE OUTLOOK CONTINUES TO BE POSITIVE A. INCREASINGLY, YOU MAY HEAR ABOUT THE "END OF THE CYCLE" SYNDROME 1. CERTAINLY IT'S A RISK - THIS HAS BEEN A LONG CYCLE 2. IT WOULD BE NAIVE TO EXPECT THESE CONDITIONS TO CONTINUE AD INFINITUM B. BUT MANY OF THE INDICATORS NORMALLY APPARENT AT THE END OF A CYCLE DO NOT SEEM TO BE IN EVIDENCE 1. INVENTORIES ARE NOT OUT OF LINE - INFLATION, WHILE HIGHER THAN DESIRABLE, IS BY NO MEANS EXPLODING 2. WHILE SOME PARTS OF OUR MANUFACTURING PLANTS ARE OPERATING AT VERY HIGH LEVELS OF CAPACITY IT'S NOT UNIFORM C. WE WOULD EXPECT 1989 TO LOOK MUCH LIKE THIS YEAR - 5 - Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 1. GNP ON AN ANNUAL BASIS SOMEWHAT LOWER THAN THIS YEAR, SAY 2 1/2 PERCENT - AN ENTIRELY SATISFACTORY NUMBER 2. KEY TO THIS E~IC W IS A REDUCTION I ~ GROW~ CONSUM ION I'NC8.E.-kS't IN rx:aRTS ABOUT WHICH I'LL SA ~~--4~~ ~ D. BUT THE CRITICAL ELEMENT IS INFLATION 1. AT THIS POINT THE RISKS IN THE OUTLOOK ARE ON THE INFLATIONARY SIDE, NOT UNDERLYING ECONOMIC GROWTH 2. IF WAGE RATES/UNIT LABOR COSTS BEGIN TO MOVE UP INTO SIGNIFICANTLY HIGH NUMBERS 3. AND IF THESE HIGHER COSTS WERE TO BECOME PERVASIVE 4. YOU WOULD SEE AN INCREASE IN THE STANDARD INFLATIONARY MEASUREMENTS . -- ~-~~" ~ _ ; ~ ~ - ~Q{>--(~ ---- 5. THIS IS NOT OUR CURRENT EXPECTATION A. CPI IN 1989: ± 5% - 6 - Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis BUT - RAPIDLY INCREASIN / THAT IV. LET ME SHIFT TO THE OTHER PART OF MY DICKENS QUOTE "THE WORST OF TIMES" - WE'RE DEALING WITH A DISTINCT DICHOTOMY A. WHILE WE HAVE BEEN EXPERIENCING THESE VERY EXCELLENT RESULTS, THE ECONOMY HAS UNDERGONE SOME VERY FUNDAMENTAL CHANGES - ~ ~·t,cµ~ LJ...-?, 1. THESE MAJOR SHIFTS HAVE AND WILL INCREASINGLY MAKE IT MORE AND MORE DIFFICULT TO DEVELOP A MONETARY POLICY THAT WILL CONTINUE TO PROVIDE THESE EXCELLENT ECONOMIC RESULTS B. FIRST CHANGE - OVER THE PAST DECADE THE WORLD ECONOMIES HAVE BECOME GLOBALIZED 1. TRADE FLOWS - PRODUCTIVE ELEMENTS OF MANUFACTURING PROCESS INTERNATIONAL /?-C.9e(, 2. FINANCIAL FLOWS - 7 - Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis C. THE OTHER VERY MAJOR CHANGE TO OUR ECONOMY - THE LEVERAGING OF AMERICA 1. IN VIRTUALLY ALL SECTORS OF OUR ECONOMY, WE HAVE SEEN AN ENORMOUS BUILD-UP OF DEBT ,,,. IN M E DETAIL ON THIS N A F ~ D. AS A RESULT OF THESE MAJOR CHANGES WE HAVE SEEN A BUILDING OF SIGNIFICANT IMBALANCES AND HISTORY TEACHES US THAT AT SOME POINT IMBALANCES HAVE TO BE CORRECTED V. ONE OF THE MORE SIGNIFICANT IMBALANCES IS THE SHARP REVERSAL IN OUR TRADE POSITION AND IN A STARTLING SHORT PERIOD OF TIME A. OUR HISTORIC CURRENT ACCOUNT SURPLUS BALANCE HAS SUNK INTO A MASSIVE DEFICIT - SOME $150 BILLION LAST YEAR 1. IN THE PROCESS WE HAVE GONE FROM BEING THE WORLD 1S LARGEST CREDITOR NATION TO THE WORLD 1S LARGEST DEBTOR NATION - A SHIFT THAT HAS OCCURRED IN JUST SIX YEARS A. FUNDS NOT USED FOR PRODUCT I VE PURPOSES - CONSUMPTION - 8 - Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis B. BECAUSE OF OUR EXTERNAL DEBT, OUR CURRENT ACCOUNT PROBLEM HAS BEEN INTENSIFIED 1. WHEREAS IN THE PAST WE RECEIVED THE BENEFIT OF DIVIDENDS AND INTEREST ON OUR NET CREDITOR POSITION 2. JUST THE OPPOSITE IS BEGINNING TO OCCUR .,, 3. WE'RE BEGINNING TO HAVE TO PAY THE BILL ON THIS MASSIVE DEBIT POSITIO~ - qoo b ~.'c..e ~110/11tCb SERVICING THE EXTERNAL DEBT HAS SIGNIFICANT SOCIAL AND STANDARD OF LIVING IMPLICATIONS ·-i-- .r ~ ~ ~ ~ ~ C:,~' c. D~P1«:nt1s, THE EXPORT OUTLOOK IS CERTAINLY MORE ENCOURAGING 1. WE THINK THE TRADE ACCOUNTS HAVE TURNED AROUND AND WILL CONTINUE TO EVIDENCE IMPROVEMENT 2. BY INFLATION ADJUSTING THE NUMBERS, THIS TURN SEEMS TO HAVE OCCURRED IN LATE 1986 3. KEY TO OUR POSIT I VE OUTLOOK FOR 1989 IS A CONTINUATION OF THIS TREND 4. THE VALUE OF THE DOLLAR HAS GREAT SIGNIFICANCE - 9 - Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis VI. AS I MENTIONED EARLIER, OUR ECONOMY IS NOW HEAVILY LEVERAGED WITH DEBT A. I ALMOST DON'T DARE MENTION THE FEDERAL DEFICIT - IT'S TIRESOME AND BORING 1. LITTLE THAT I CAN ADD TO WHAT YOU ALREADY KNOW 2. BUT THE SOLUTION IS ABSOLUTELY KEY TO DEALING WITH THE IMBALANCES I HAVE NOTED 3. WE HAVE NEVER GONE THIS FAR INTO A POSITIVE ECONOMIC CYCLE AND HAVE CONT I NUED TO EXPERIENCE DEFICIT SPENDING (AS A PERCENTAGE OF THE GNP AS IS THE CURRENT CASE) A. THIS FISCAL YEAR± $150 BILLION ~,t-jb B. ABOUT 3--1'.':(2 % OF GNP 4. BRAND NEW EXPERIENCE A. HOW WOULD WE DEAL WITH A RECESSION - DEEP END OF THE POOL - 10 - Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 'I ~ I"" , 5. DEBT )... - TREASURY DEBT - ~ )_ I tt,J_,f, '1,\{ ~ ~ ~ ,;;~ b/t/, ~ ~ /~? ~. S- ~ ALLOCATION OF RESOURCES - INTEREST PAYMENTS /0 .1o ~lV/4 ~ N\o~ ~ ~c.Lh - ~.S. A-- . ,~ -,--·~ B. OUR CONSUMERS ARE ALSO FACED WITH BURGEONING LOADS OF DEBT 1. MENTIONED OUR HIGH LEVELS OF CONSUMPTION 2. FINANCED WITH INCREASING LEVELS OF INSTALLMENT DEBT 3. AND A PERSONAL SAVINGS RATE THAT IS SIGNIFICANTLY BELOW WHAT WE'D NORMALLY EXPECT 4. THE CONSUMER IS VERY VULNERABLE TO A CHANGE IN ECONOMIC CIRCUMSTANCES - DEBT SERVICING COULD BE A VERY DIFFICULT PROBLEM C. WHAT IS TRUE FOR THE CONSUMER IS MORE THAN TRUE FOR CORPORATE AMERICA 1. TAKEOVERS 2. MASSIVE INCREASE IN DEBT LOAD 3. CONCURRENT REDUCTION IN EQUITY - DECAPITALIZATION - 11 - Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 4. RESULTING INCREASE OF DEBT TO WORTH 5. ANOTHER SECTOR OF OUR ECONOMY THAT IS VERY VULNERABLE IN THE EVENT OF A RECESSION VII. WHAT DOES ALL THIS MEAN FOR MONETARY POLICY - CERTAINLY THESE ISSUES VASTLY COMPLICATE THE PROCESS - SOLUTIONS POLITICAL - BUT MUST BE A PART OF MONETARY POLICY DELIBERATIONS A. IT WILL BE HARDER AND HARDER TO OPERATE MONETARY POLICY THAT WILL CONTINUE TO PRODUCE THESE GOOD RESULAS WITHOUT SOME BASIC CORRECTION ~ ~ fv ~~ do ~J}:_ B. AND THE NECESSARY ADJUSTMENTS WILL REQUIRE COOPERATION AND COORDINATION BY THE OTHER PARTS OF THE INDUSTRIALIZED WORLD 1. AS OUR CONSUMPTION LEVELS GO DOWN AND OUR EXPORT LEVELS GO UP, JUST THE OPPOSITE WILL NEED TO OCCUR WITH OUR TRADING PARTNERS 2. THE COORDINATION OF ECONOMIC, FISCAL AND MONETARY POLICY AMONG THE MAJOR INDUSTRIALIZED NATIONS IS PERHAPS THE GREATEST CHALLENGE OF THEM ALL - 12 - Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 3. EACH COUNTRY HAS DEEP SEATED SELF- INTERESTS 4. IT REMAINS TO BE SEEN WHETHER THESE OVERRIDING SELF- INTERESTS CAN BE BALANCED AND COORDINATED IN A WAY THAT WILL DEAL WITH THE GLOBAL ECONOMIC IMBALANCES VIII TO CONCLUDE AND IN A PURELY DOMESTIC CONTEXT, OUR . 0 VER RI DI NG OBJ EC T I VE WI LL BE TO PROV I DE CO lfD I T I Or rn 9F CONTINUING ECONOMIC GROWTH BUT WITH PRICE STABILITY A. OUR ECONOMY IS CURRENTLY GROWING AT A RATE THAT EXCEEDS THE POST WORLD WAR II TREND LINE - 40 YEARS - 3%; 1. PARTICULARLY IF YOU LOOK AT THE MORE RECENT EXPERIENCE - OVER THE PAST 10 YEARS - 2-1/2% 2. PUSHING HARDER WOULD CLEARLY RISK HIGHER LEVELS OF INFLATIONARY PRESSURES 3. AND WE'VE BEEN THERE BEFORE -- THE LATE 1970S OUGHT TO BE INSTRUCTIVE B. A CORRECTIVE PROCESS IS VICIOUS AND THE MIDWEST AND, MOST PARTICULARLY WISCONSIN, WERE TERRIBLY HARD HIT IN THE PROCESS - 13 - Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis C. THE FEDERAL RESERVE SYSTEM IS VERY COMMITTED TO PREVENTING A RECURRENCE OF THIS INFLATIONARY EXPERIENCE 1. AS WE HAVE GONE THROUGH THE YEAR, WE HAVE REPEATEDLY TAKEN STEPS TO RESTRAIN THE LEVEL OF ECONOMIC GROWTH A. LATE MARCH - MONETARY POLICY TIGHTENING MOVES 2. THE INCREASE IN THE DISCOUNT RATE ON AUGUST 9 3. WE HAVE EVERY INTENTION OF CONTINUING A POLICY THAT WILL CONTAIN AND ULTIMATELY BRING THE LEVEL OF INFLATION BACK DOWN TO A MORE ACCEPTABLE LEVEL D. DESPITE THE DIFFICULTY OF THE CHALLENGE - THE BALANCES HERE ARE INCREDIBLY NARROW - SO FAR WE HAVE BEEN AHEAD OF THE CURVE ON THESE ISSUES 1. I HAVE EVERY EXPECTATION THAT WE WILL CONTINUE TO DO SO - 14 - Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis

Silas Keehn (1988, September 26). Regional President Speech. Speeches, Federal Reserve. https://whenthefedspeaks.com/doc/regional_speeche_19880927_silas_keehn

@misc{wtfs_regional_speeche_19880927_silas_keehn,
  author = {Silas Keehn},
  title = {Regional President Speech},
  year = {1988},
  month = {Sep},
  howpublished = {Speeches, Federal Reserve},
  url = {https://whenthefedspeaks.com/doc/regional_speeche_19880927_silas_keehn},
  note = {Retrieved via When the Fed Speaks corpus}
}