Regional President Speech

"THE FED'S IMPACT ON THE MASSACHUSETTS ECONOMY" Remarks by Cathy E, Minehan at a breakfast honoring the 1994 Boston Globe 100 Companies June 8, 1994 I want to thank Bill Taylor for inviting us all here this morning to pay tribute to this exciting group of business people who truly represent the future of the Massachusetts economy. After the past few years of .dismal economic reports about our regional economy, it really feels good to be here on a June morning at a time when our economic engines are clearly picking up steam. I also want to thank Larry Edelman in his new role as the Globe's business editor, and I want to commend the work of Charlie Stein in his reporting on the Globe 100 -- I think he painted an interesting picture of the emerging industries--some of them already very large--that form the core of Massachusetts business growth. And special congratulations go to Richard Egan, Roger Marino and EMC in its selection as the Globe 100 "company of the year." 2 As many of you know, until a few months ago Dick Syron was the President of the Boston Fed and served as a member of the Federal Reserve' s monetary policymaking body -- the Federal Open Market Committee. Keeping in mind that the main responsibility of any central banker is to worry about what can go wrong, it was Dick's job to worry about the economy and the financial markets, and it was my job to worry about the payments system. All I had to do was to make sure nothing went wrong with the 60 billion dollars that the Boston Fed transfers electronically each day, or with the 5. 5 million checks that we process each night, or the 77 million dollars in cash that we ship out to banks each day, or with the 80 billion dollars in Treasury securities that we process. At the time, I felt that I had a pretty full plate. But then Dick packed his bags for New York. Now I still worry about the payments system, but those complexities pale against what is involved in the deliberations of the Open Market Committee. In the payments system, we are dealing primarily with money and 3 technology. But in monetary policy making, we deal with all of that plus economic policy decisions and the psychology of the financial markets, Needless to say, it has been an interesting few months as the Fed has been faced with some particularly difficult decisions with respect to monetary policy. Larry and his reporters have devoted considerable business page space to the Fed's actions, and on a few occasions we have even caught Matt Storin's attention for the front page. Drawing on statements by Chairman Greenspan, I would like to briefly discuss the Fed's monetary policy actions and then turn to the outlook for the local economy. On February 4 of this year, we initiated a series of interest rate increases. These followed an extended period of easing that began in the spring of 1989. At the risk of bringing back painful memories, you will recall that by mid-1989 the United States economy was exhibiting the early 4 symptoms of an economic slowdown, due in part to what became known as the credit crunch. Debt burdens had risen in both businesses and households, and significant weakness had developed in the collateral underlying this debt, especially real estate. Banks, faced with rising loan losses and the need to restore their capital positions, curtailed lending, making it difficult for many businesses to borrow. Adding to these difficulties, consumers and businesses were growing more cautious; the federal government was embarking on a program of massive defense cuts; and our major trading partners were beginning to slide into their own recessions, with adverse consequences for our exports. To counteract these drags on the economy, the Fed began to lower short term interest rates through a long series of steps that continued through much of 1992. Lower interest rates produced a sharp decline in debt service charges to consumers and businesses, and encouraged widespread refinancings and restructuring of debt. 5 The result was an alleviation of the drag on the economy associated with the credit crunch and a stimulus to spending in interest sensitive sectors. The economy began to expand again. In 1993, economic growth picked up substantially, with particular strength in the interest-sensitive sectors - consumer durables, business equipment investment and residential construction. Indeed, the lowest borrowing rates in a quarter century resulted in soaring housing construction and substantial investment in business equipment in late 1993. Accompanying this improved economic climate has been a pronounced recovery by the banking industry and greater availability of credit. Meanwhile, the inflation rate for 1993 as measured by the consumer price index was 2 3/4 percent, the lowest rate of increase since 1986 and reminiscent of the low rates of inflation of the 1950s and 1960s. So, if inflation appears to be under control, why did the Fed move to raise interest rates in early 1994? 6 The rationale for the rate hikes was laid out by Chairman Greenspan to the Congress in February. The deliberate effort to counter the headwinds that were inhibiting economic growth appeared to have been successful. Thus, there was no longer any policy purpose in maintaining an accommodative monetary stance. Continuing that accommodative position would run the risk of rekindling inflationary pressures. While some observers, including business cartoonist Bruce Hammond, seem to think that the Fed is beating a dead horse when it comes to inflation, monetary policy cannot rely solely on current conditions in gauging the threat of inflation. Shifts in monetary policy generally affect the economy with a considerable lag. So if you wait to see the problem, it will get worse before it gets better. The challenge in monetary policy formulation is to anticipate future inflationary pressure and to take action to counter it. Or, to put it the way former Chairman McChesney Martin did more than 30 years ago, "to remove the punch bowl just when the party gets going." 7 The question now is what does all this mean for the Massachusetts economy? In some ways, New England in general, and Massachusetts in particular, was the paradigm for this recession and recovery--a spectacular boom fueled by real estate, followed by a bust exacerbated by the extended credit crunch, and now an upturn driven by the interest-sensitive sectors. Will the Fed damage our local recovery by removing the punch bowl too early? I think not; but I also think that Massachusetts faces some challenges. In my view, these are largely longer-term and structural in nature and need to be addressed by all of us working locally rather than by national economic policy. Let me turn to the economic outlook and then to the challenges. Economic activity is definitely on an uptrend in Massachusetts. Because data on gross domestic product - GDP - are not available for regions except with a very long lag, our basic gauge of how a region or state economy is performing is payroll employment, a count of people on the payrolls of businesses like yours. These data show 3 .1 8 percent job growth in Massachusetts from April 1993 to April 1994 - growth at a pace faster than the national trend. As all of you are undoubtedly well aware, New England took the biggest hit of any region in the 1990-91 recession in terms of job loss. Massachusetts was the hardest-hit state in New England, losing more than one in nine jobs over three-and-a-half years. But employment in the state bottomed out in mid-1992, and to date, Massachusetts has regained more than one-third of the jobs lost in the recession. The state's unemployment rate fell to 5. 8 percent in May, keeping us below the national average for the fourth consecutive month. The most interest-sensitive sector, the housing market, has been recovering quite strongly in Massachusetts; in recent months this sector has been doing relatively better here than in other parts of the country that recovered sooner. Recent reports indicate that housing is slowing somewhat nationally; the data, however, do not yet show a noticeable slowdown in Massachusetts. 9 The job growth we're currently enjoying in Massachusetts is concentrated in services - a hodgepodge category that runs the gamut from health and legal services to auto and other repair; from software to personal and household services; from high value-added consulting to washing windows. And the range of industries represented in the Globe's "growth 50" list indicates that other hot areas include biotech and "green" industries such as environmental testing equipment as well as innovative eating and drinking places and financial services. Looking ahead, the New England Economic Project (a nonprofit forecasting group, better known as NEEP) released its latest forecast last month. The NEEP forecasters expect continued employment growth in Massachusetts, roughly at the national pace. Job gains are expected to be particularly strong this year ( outpacing a relatively strong national forecast), then continuing in tandem with the U.S. economy in 1995 and 1996. Manufacturing declines continue throughout the forecast period (because of ongoing defense cutbacks and some computer restructuring), but more slowly. It's worth noting 10 that the national forecast for manufacturing employment does not show much growth either, largely because of ongoing productivity gains, Early on, this was called a "jobless recovery" because employment in the nation picked up much less after the official recession trough than was typical in earlier recoveries. The slowness of job growth was mostly attributable to the slow pace of output growth in the initial stages of the recovery. However, widespread reports of restructuring - doing more with less, especially less labor - in many industries led to concern that even when output growth picked up, job gains would be anemic. In the last year, however, both output and employment growth nationally have been on a more typical recovery path. But there is no question that many firms are trimming their workforces; and as the economy has picked up, productivity improvement reflected in moderate rates of unit labor cost growth has continued as has investment in technological change, These changes are vital if we are 11 to be successful in an ever more competitive world economy, but the transition may not be an easy one. The adjustments the economy must continue making pose both a challenge and an opportunity to businesses in Massachusetts. As a recent report for the Massachusetts Taxpayers Foundation confirmed, Massachusetts is an expensive place to do business, despite some progress on labor and land costs and on a variety of "public" fronts such as workers' compensation. Beyond the cost picture the region faces some clear minuses such as ongoing restructuring at some of our large computer makers and continued defense cutbacks, and faces uncertainty as to the impact of health care reform. As these traditional sources of jobs decline, we are losing many high-paying manufacturing jobs. Good pay now depends increasingly on more formal education and interpersonal skills for all workers. At issue is what we must do to ensure the region's infrastructure is prepared for this transition and for the new industries that are emerging. 12 One way to start is to make sure business concerns are known to the public sector by taking advantage of opportunities to communicate and work with state and city officials. We must also work to ensure that the fruits of the recovery are equitably shared by everyone. To do this, we should make certain education remains a key priority and that more widely available, relevant, and employer-linked training programs are developed. And we all have a responsibility to seek out opportunities to promote Massachusetts' strengths to the world at large. Finally, many of us can benefit directly from restructuring by being its toolmakers. Productivity increases are largely made possible by capital investment. Massachusetts businesses are already key suppliers of the productivity-enhancing methods and techniques--via consulting and software--and the capital equipment that underlies much restructuring. Thus, while the current phase of productivity growth and restructuring throw doubt into our future, it also 13 represents a business opportunity we in New England are particularly suited to address. In closing, I'd like to comment a bit about what I consider to be the limits of economic forecasting. Perhaps the best way to begin is with the story of the latest New England employment data. You would think that, given our ability to track and measure data, we would know with some certainty where we are, even if where we're going is sometimes cloudy. However, until just about 3 months ago, this wasn't the case for this recovery. We were faced with the puzzle that our basic employment data indicated local economic activity was well behind the nation's, despite anecdotal evidence of a pickup. Not only that, but two sources of data--one derived from households and the other from business records--diverged sharply. This puzzle was largely resolved three months ago, when revised payroll data were released, indicating that the state's employment trough actually occurred in mid-1992, not over a year later as the earlier data had said, What happened was the jobs at the 14 smallest and newest firms, and in this case, the fastest growing ones, weren't counted adequately until the data were revised--over a year too long of doom and gloom. The point is that economic data can tell you only so much. To properly assess the current health of the regional economy I've come to realize there is no replacement for talking to people and businesses, and listening to what they are doing and what their expectations and plans are for the future. Each Reserve Bank has a formal process for doing exactly that prior to each Open Market Committee meeting; many of you may be familiar with what we call the "Beige Book." It consists of a qualitative assessment of economic conditions in each Federal Reserve District based partly on a telephone survey of firms in various sectors. (Some of you in this audience are included in that survey - but I won't name names since we want to protect your confidentiality and hence preserve your willingness to share your views and results with us.) While the information in the Beige Book is not quantitative, 15 it provides a valuable guide to the latest economic trends at the regional level. More generally, some of the most useful information on business conditions is gathered by participating in events such as this one where there is an opportunity to talk informally with business leaders about what is going on in their firms and industries. At the Open Market Committee meetings themselves, the policy-makers around the table are often most attentive during the go around when each Reserve Bank President discusses conditions in the District. In that regard, the twelve Reserve Banks across the nation play a pivotal role in assuring that inside-the-beltway perspectives and attention exclusively to national economic data do not come to overly dominate monetary policy. There has been a genuine diversity of concerns and perspectives maintained by this structure, and it is a fascinating element of the whole process. This is clearly a time of transition, and some uncertainty, at the Boston Fed, but we have a tradition of close involvement with First 16 District businesses and with the community as a whole. This commitment is vitally important to our ability to represent the District in policy discussions, and it is something I personally want to assure you is not at all uncertain. In sum, Massachusetts, and New England as a whole, is now tracking, and even surpassing the national rate of recovery. Your businesses and others are thriving. Challenges in the form of cost pressures, and in the form of cutbacks in traditional regional growth areas are real, but so is Yankee ingenuity-which is alive and well even among those of us who are transplants to the region. I look forward to working with all of you in the days and years ahead. Thank you.

Cathy E. Minehan (1994, June 7). Regional President Speech. Speeches, Federal Reserve. https://whenthefedspeaks.com/doc/regional_speeche_19940608_cathy_e_minehan

@misc{wtfs_regional_speeche_19940608_cathy_e_minehan,
  author = {Cathy E. Minehan},
  title = {Regional President Speech},
  year = {1994},
  month = {Jun},
  howpublished = {Speeches, Federal Reserve},
  url = {https://whenthefedspeaks.com/doc/regional_speeche_19940608_cathy_e_minehan},
  note = {Retrieved via When the Fed Speaks corpus}
}