Statement by Thomas M. Hoenig, President, Federal Reserve Bank of Kansas City, before the Committee on Banking, Housing, and Urban Affairs, U.S. Senate, March 10, 1993.
Spanning the heartland, the Tenth District has traditionally relied on its natural resource industries. As a share of total output, for example, agriculture and energy are roughly twice as important to our economy as to the national economy. However, after severe farm and energy recessions in the 1980s, our economy has become more diverse. The region's manufacturing base is growing, a wide range of service firms is flourishing, and tourism is anchoring growth in some parts of the District.
Thanks, in part, to this more diverse economic base, the District economy felt less sting from the national recession of 1990-91 and has outpaced the nation throughout the recovery. The recent experience of the District is a sharp reversal from the 1980s, when our region consistently trailed the national economy because of farm and energy recessions and a regional downturn in real estate.
My testimony will discuss current economic conditions and prospects for growth in the Tenth Federal Reserve District. I will also share my views of the national economy and the role for monetary policy. In brief, the District economy grew at a moderate pace in 1992 and will probably grow moderately again in 1993, roughly matching the growth pace of the national economy. I expect the nation's recovery to stay on track, picking up momentum over the course of the year, and my view regarding monetary policy is that it should promote maximum sustainable growth within an environment of price stability.
RECENT PEFORMANCE OF THE TENTH DISTRICT ECONOMY
The economy of the Tenth Federal Reserve District grew moderately in 1992. Contributing to growth were the construction and retail sectors, which were generally strong across the seven-state region. Agriculture also posted a good year, with bumper crops and solid livestock profits. Energy activity remained sluggish, but there was a spurt of new drilling in the fourth quarter as exploration firms took advantage of expiring tax credits for coal-seam gas. Manufacturing activity slumped across the District, matching similar weakness nationwide.
The District economy grew faster than the national economy in 1992, based on two broad economic gauges. Real personal income in the District grew 2.3 percent from the third quarter of 1991 to the third quarter of 1992 (the last period for which data are available), compared with a 1.7 percent gain in the nation. Employment in the District grew 1.2 percent from the fourth quarter of 1991 to the fourth quarter of 1992, compared with 0.4 percent growth in the nation.
District Economy Outpaces the Nation
The Tenth District economy has been outperforming the nation throughout the recovery. Since the recession ended in March 1991, the District has added jobs at an annual rate of 1.1 percent, while employment in the nation has edged up at an annual rate of 0.2 percent. What accounts for the more buoyant economy in our region?
* Farm recovery. The farm economy, in contrast with some other parts of the national economy, has enjoyed a strong recovery. In the mid-1980s, agriculture suffered a severe downturn, as export markets and farmland values both declined. Since then, farmers have posted record or near-record net cash incomes, allowing them to put their financial house in order. Farmland values are still well below the peaks of the early 1980s, but farmers and their lenders are in solid financial condition. Strong farm income has also helped buoy business conditions in many rural communities across the region.
* Stable energy industry. The District's energy industry has stabilized after going through its own recession in the 1980s. Energy-dependent areas of the District, from Wyoming to Oklahoma, experienced downturns after oil prices plummeted in 1986. In the wake of lower oil prices, the energy industry down-sized. Although painful, the correction was relatively quick. More recently, the industry has steadied, being neither a significant source of strength, as in the early 1980s, nor a drag, as in the late 1980s.
* Strong construction activity. Chiefly responsible for maintaining the region's lead over the nation during the recovery has been a booming construction sector. Construction jobs in the District have grown at an annual rate of 2.8 percent throughout the recovery, compared with a decline at an annual rate of 1.8 percent in the nation. Construction activity has been robust in virtually all categories. Residential building in the region has surged, largely in response to lower mortgage rates. Nonresidential and nonbuilding construction have benefited from a fairly large number of public building projects under way in District states. The best example of such activity is the new Denver International Airport, which will be completed this year. Commercial real estate has been stable, with declining office vacancy rates and few new projects under way.
* Strong financial institutions. The District's financial institutions are generally strong, having recovered from the farm, energy, and real estate problems they faced in the 1980s. Earnings, asset quality, reserve coverage, and capital coverage are at their highest levels since the early 1980s. Tenth District banks. have also outperformed banks in the rest of the nation in 1992 in all of these dimensions. Moreover, District employment in financial services has continued to grow during the recovery, in contrast to a decline in the nation.
* Buoyant trade and services. Wholesale and retail trade activity have grown steadily in the District throughout the recovery. The region has continued to attract wholesale firms due to its central location, and retail activity has been solid because of the District's overall growth in jobs and income. District employment in wholesale and retail trade has grown during the recovery, while national employment in these sectors has shrunk. Similarly, the District's service sector has grown faster than the nation's because of continued expansion in business services, health care, and tourism. Tourism activity, despite a sluggish national economy, has been especially strong in the Rocky Mountains and in the newly developed tourist areas of southern Missouri.
While several sectors have helped buoy the Tenth District economy, manufacturing activity in the District has been as weak as in the nation. Durable goods production has been especially weak in the District, and jobs in durables industries have fallen at an annual rate of 2.5 percent during the recovery. Automobile production, which is important to the District economy, posted a rise at District auto plants during the 1992 model year; however, jobs in the industry have continued to drop. The general aviation industry, which is concentrated in the Tenth District, is continuing to suffer from weak sales. The slump in commercial aircraft is also hurting Wichita's economy, where Boeing recently announced a layoff affecting 6,000 workers in 1993 and 1,000 in 1994. Defense cuts have hurt in some areas and particularly in the State of Missouri. Nondurable goods production has also been weak in the District, where jobs in nondurables industries have grown at an annual rate of only 0.1 percent.
Mixed Performance in District States
In a District that spans seven states from the Ozarks to the Rockies, it is not surprising that economic performance has varied by state. Overall, job growth in six of the seven states has outpaced the nation. Employment growth in the recovery has been strong in Colorado and Kansas and weaker in Missouri and Oklahoma.
* Colorado. Colorado's economy has grown at a robust pace throughout the recovery, with job growth averaging 2.6 percent a year. Construction in the state has boomed. Strong population growth and low mortgage rates have led to a spurt in housing starts and rising home prices. The new Denver airport and highway improvements across the state have also bolstered construction activity. Services and tourism have also been quite strong, helping to offset weakness in mining and manufacturing.
* Kansas. The diverse Kansas economy has grown solidly throughout the recovery, adding jobs at an average rate of 1.6 percent a year. The state's service sector has been strong, with steady gains in business and personal services, particularly in the Kansas City metropolitan area. Construction has been boosted by a strong residential market and a pickup in public infrastructure projects. The state's important farm economy is prosperous due to high cattle prices and a large wheat harvest. The general aviation, automobile, and energy sectors remain weak, but they have only slightly dampened what has been a healthy state economy overall.
* New Mexico. The New Mexico economy has grown steadily in the recovery. Employment in the state has increased at an annual rate of 1.7 percent, with services and government activity providing the greatest strength. New Mexico's defense labs and installations have benefited somewhat from defense cuts elsewhere in the nation, and state and local government employment has increased. Tourism has also been a plus for the northern half of the state. Partly offsetting the strength in these sectors, manufacturing and mining have been somewhat weaker than in the two top states.
* Nebraska. Nebraska's economy has grown modestly during the recovery. The state's job rolls have grown at an annual rate of 0.9 percent. Despite sluggish job growth, the state's unemployment rate is less than 3 percent, one of the lowest in the nation. The state's nondurable manufacturing, dominated by food processing, has remained buoyant. Healthy wholesale trade and service sectors have also helped bolster Nebraska's economy. Most of the state's economic gains, however, have been in metropolitan areas and smaller cities that serve as trade centers for their surrounding areas. Rural parts of the state continue to languish.
* Wyoming. Wyoming's economy has posted modest growth during the recovery, adding jobs at an annual rate of 0.8 percent. The state's energy-based mining industry remains weak, although production of soda ash--used in glassmaking--has benefited from stronger construction activity across the nation. Service growth has been solid, mainly due to tourism-related development. Tourist destinations have continued to grow faster than other parts of the state.
* Missouri. Throughout the recovery, Missouri's economy has grown more slowly than most other District states due to its heavy reliance on manufacturing. Kansas City, which depends less on manufacturing, has fared better than the eastern part of the state. Overall, Missouri's job rolls have grown at an annual rate of 0.4 percent throughout the recovery. Employment in manufacturing has fallen at an annual rate of 1.5 percent during the recovery. Durables industries, the backbone of the state's industrial base, have been especially weak. The manufacturing slump has been partly offset by healthy gains in service employment. A strong farm economy, meanwhile, has buoyed local economies in rural parts of the state, and southwestern Missouri has been strong because of tourism.
* Oklahoma. Oklahoma has been the District's weakest economy during the recovery. Employment has declined at an annual rate of 0.1 percent since the recovery began. The state's key energy sector remains depressed, even after a mild upturn in drilling late last year. Manufacturing has generally been weak, despite improved auto production in the state during the 1992 model year. Trade and construction activity in the state has sagged during the past two years.
OUTLOOK FOR THE TENTH DISTRICT ECONOMY
I expect the Tenth District economy to grow at a moderate pace in 1993. Preliminary indicators suggest the District economy is off to a good start this year. Retailers report that consumer spending, which picked up toward year-end, has continued to be relatively strong in January and February. Moreover, banks in the District report strengthening loan demand, and farm income is rising slightly.
Survey of Economic Advisory Council
To provide current information on the District's economic prospects, it is useful to highlight a recent survey we conducted of our Tenth District Economic Advisory Council members and to report their expectations for 1993. With representatives from small business, agriculture, labor, and consumer interests, the council serves as a valuable source of economic information throughout our region and provides useful views on the overall stance of Federal Reserve monetary policy (council members are listed in the Appendix).(1)
Our District advisory council is optimistic about the region's economy in 1993. They report improved sales early in the year, both for their firms and in their communities. The sales gains are reported from a diverse mix of firms--from food processors to building materials suppliers.
Most council members expect their profits to improve in 1993 because of both increased sales and further cost cutting. A substantial majority of council members also report a general air of economic optimism in their communities. In line with their expectations, a majority of council members plan to increase capital spending in 1993. Nearly all of the council members that plan to expand spending this year expect credit to be readily available.
Council members also report that employment growth is currently lagging behind other business indicators. The number of firms adding workers so far this year just about equals the number of firms not adding workers. Similarly, council members are evenly divided between those planning to increase employment this year and those planning no new jobs. Only one council member plans to cut jobs in 1993.
Outlook for District Industries
Additional information that points to moderate growth in the District economy in 1993 is the outlook for key District industries. We expect agriculture to remain strong, energy to remain stable, construction to slow, and manufacturing to improve.
* Agriculture. The District farm economy should stay on its recovery course in 1993. Livestock producers' profits are expected to remain strong, but last year's bumper harvest will hold down crop prices. The effect of lower crop prices on farmers' incomes in 1993 will be cushioned by larger sales volumes and bigger government payments to farmers. Farm income may therefore edge up, although there may be little improvement in the industry's already strong balance sheet.
The expected conclusion of two important trade pacts this year, the Uruguay Round of General Agreement on Tariffs and Trade negotiations and the North American Free Trade Agreement, will have a critical effect on the farm economy's long-term outlook. The District farm economy stands to reap substantial benefits from freer agricultural trade.
* Energy. The energy industry will probably be stable in 1993, with little change in overall activity. Currently, drilling activity is edging down from the spurt in the fourth quarter of 1992. With oil prices likely to remain relatively flat, there is little prospect for significant change in an industry that is operating at a fraction of the activity reached a decade ago.
* Construction. Building activity may slow somewhat in our region in 1993. Large housing inventories that accumulated across the region in 1992 will require some time to be absorbed. Moreover, some big public projects, such as the Denver airport, will wind down this year.
* Manufacturing. Manufacturing will probably pick up in 1993 as the national economy improves. Factory production in the region will benefit from a likely increase in consumer spending on durables. Defense cutbacks will continue to hurt some parts of the District.
Overall, I expect the Tenth District economy to grow at a moderate pace in 1993, roughly equal to the nation's pace. The nation's ongoing recovery will also have an important bearing on the growth we achieve in our District. Improvement in the national economy will be a prerequisite to a rebound in District factory production, much of which is sold in national and international markets.
THE NATIONAL OUTLOOK AND MONETARY POLICY
Turning to the national outlook, I expect the national economy to continue to grow moderately in 1993. Real GDP growth should pick up over the year, averaging about 3 percent from the fourth quarter of 1992 to the fourth quarter of 1993. With continued moderate growth, inflation will likely edge down to just below 3 percent.
The economy in 1993 will benefit from the effects of past easings of monetary policy. The current low level of interest rates will spur spending on consumer durable goods, business fixed investment, and housing. In addition, the economy will gain momentum as businesses build inventories in anticipation of stronger domestic demand.
Other sectors of the economy will contribute little to economic growth in 1993. Net exports are likely to slip as sluggish growth abroad limits U.S. export growth and the expansion at home boosts U.S. imports. And total government spending is not expected to change substantially relative to a year ago.
Structural factors will also influence the pace of the national expansion. Balance sheet improvements among households, businesses, and financial institutions will lend support to the recovery. Although the restructuring of balance sheets is still under way, considerable progress has been made in reducing debt burdens. Acting to dampen overall growth in 1993 will be the continuing shift of resources from defense to nondefense industries.
Inflation is likely to continue to decline in 1993. With the unemployment rate expected to fall gradually through the year--to 6.9 percent in the fourth quarter--wage pressures will remain modest. Wage moderation, therefore, should help dampen inflation further. I expect consumer price index inflation to decline to about 2.8 percent in 1993 on a fourth-quarter over fourth-quarter basis.
Given this economic outlook, I believe the current stance of monetary policy is appropriate. Past monetary policy easings--which I supported last year as a voting member of the Federal Open Market Committee--have contributed to the improvement we are seeing in interest-sensitive sectors, such as housing and investment.
I think we all agree that the goal of monetary policy is to promote maximum sustainable growth over time. In the near term, Federal Reserve policy should be geared toward fostering a solid expansion, thereby encouraging job growth and the investment spending needed to spur the economy's potential growth rate. But just as important, and consistent with this goal, the Federal Reserve must work toward ensuring an environment of price stability. Low inflation is a prerequisite to an efficiently operating economy and to the achievement of maximum growth over time.
For the foreseeable future, the Federal Reserve will need to monitor a wide range of information in conducting monetary policy. As you have heard from Chairman Greenspan, the monetary aggregates, in particular, will probably not be as informative as in the past. Relationships among the aggregates and the economy are changing as more lending and borrowing are taking place outside the depository sector. Indeed, fundamental changes in credit markets are under way worldwide. Thus, in assessing the state of the economy and the stance of monetary policy, we will monitor a wide range of financial and economic indicators--in the Tenth District, nationally, and internationally. And monetary policy will be responsive and flexible in the face of a rapidly changing and challenging economic environment. (1.) The attachment to this statement is available from the Federal Reserve Bank of Kansas City, Kansas City, MO 64198-0001.
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|Title Annotation:||Statements to the Congress|
|Publication:||Federal Reserve Bulletin|
|Date:||May 1, 1993|
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