Hearing of the Senate Banking, Housing and Urban Affairs Committee - Semi-Annual Monetary Policy Report by the Federal Reserve

Federal News Service

HEADLINE: HEARING OF THE SENATE BANKING, HOUSING AND URBAN AFFAIRS COMMITTEE

SUBJECT: SEMI-ANNUAL MONETARY POLICY REPORT BY THE FEDERAL RESERVE

CHAIRED BY: SENATOR RICHARD SHELBY (R-AL)

WITNESS: ALAN GREENSPAN, CHAIRMAN, BOARD OF GOVERNORS, THE FEDERAL RESERVE

LOCATION: 216 HART SENATE OFFICE BUILDING, WASHINGTON, D.C.

BODY:
SEN. ELIZABETH DOLE (R-NC): Thank you, Chairman Shelby.

Today we welcome Chairman Greenspan back to this committee for our fourth and final semi-annual monetary policy report of the Federal Reserve for this Congress. I appreciate the chairman's willingness to visit with us so often and explore areas of concerns with regard to our economy and monetary policy.

Last month Chairman Greenspan assured us that he has observed real wages increasing for Americans in the past four months. This in turn has helped increase disposable income, a trend that Chairman Greenspan, I understand, expects to continue as the natural course of the recovery and growing strength of our economy. I cannot overstate the importance of this trend for our men and women in the workforce, and appreciate Chairman Greenspan's continued optimism in the American economy.

I was very pleased with the release last week of the June industrial production data indicating the growing strength in the manufacture of durable capital goods. North Carolina has been hit very hard by the loss of manufacturing jobs over the past years. Any reversal of this trend is indeed welcome news.

There have been some excellent numbers for North Carolina. According to figures released today from the Bureau of Labor Statistics, North Carolina has created 35,400 new jobs in the month of June. This positive news highlights the transition which is occurring in North Carolina with the loss of low-skilled manufacturing jobs and the creation of jobs in service sectors which require a good education, with a demand on computer skills. Continuing education must continue to be a top priority for us to respond to this demand.

I've spoken before about the work that Senators Enzi, Alexander and I are undertaking to write the Higher Education Access, Affordability and Opportunity Act of 2004. It provides additional assistance to our community colleges and other institutions of higher learning for training and retraining students in high-growth job markets. We hope to introduce this bill shortly.

In addition, I remain concerned about a number of factors, such as high energy prices, the rise in steel prices, and the size of our trade deficit. Despite these concerns, though, I'm confident that through increased trade, hard work, global communications and continuing education of our workforce, we will achieve new levels of opportunity for all Americans, and global security.

I again thank Chairman Greenspan for joining us here today, and I look forward to his testimony.

Thank you, Mr. Chairman.

BREAK IN TRANSCRIPT

SEN. DOLE: Mr. Chairman, I'm concerned about how movement in the Chinese economy could affect us, and I'd like to ask you about this.

The Chinese, of course, have a very weak banking sector. Half of their loans are bad. There are signs of a growing bubble in their commercial real estate sector, a growing U.S. currency reserve, at $415 billion as of January.

Chairman Greenspan, while the Chinese economy is small compared to ours, how concerned are you about these and other potential problems in the Chinese economy?

Recently China appeared to have realized that their growth is not sustainable, and they've taken steps to slow down their rapid growth. One of the areas where they've pulled back is with steel production.

And recently I've been contacted by our transit authorities, both in Charlotte and in Raleigh, North Carolina, because they're going to be starting soon on construction, and they've expressed deep concern on how this rise in steel prices is presenting real problems to their cost projections. I have to imagine that commercial real estate and other industries will be impacted as well, will suffer because of these cost increases.

Could these steps by the Chinese government to slow down their economy potentially trigger inflation in the United States? With continued globalization, can China, in combination with any other countries with high growth, export inflation to the United States. And if so, do we have any monetary tools to combat such a problem?

MR. GREENSPAN: Senator, the Chinese economy is slowing down and it's a deliberate effort on the part of what is a partial centrally- planned economy with an ever-growing market segment. And it's a very tricky policy that they have to implement to get it right.

Investment has gone down-I should say the rate of increase in investment has gone down very materially on a year-over-year basis. And clearly, through the second quarter, where their quarter-by- quarter rate of growth really showed virtually to a halt, they exhibited considerable removal of very major elements of growth. However, they don't seem to be sinking much further. In fact, their exports look, frankly, a little bit better in June, and overall it's very likely that largely because of the nature of the central planning, they will try to calibrate it in a way which improves the outlook. But their economy, as you point out, is still relatively small.

In the areas which impact directly on us, I find it most unlikely that their contraction in steel production, as large a producer as they are, will induce any significant rise in steel prices. There has been, as you know, some significant decline in steel prices in the United States, but judging from the scrap prices in recent weeks it's come back a bit in part because the demand is still reasonably strong.

I do not believe that the Chinese can export inflation to us. It's extremely difficult to do that, and they're not the type of economy which so interfaces with us that would create such a problem. It is important that they move as quickly as the can to a market economy, and I think that they are trying to move in that direction. But until they have succeeded, they will still have the types of problems that you suggest.

SEN. DOLE: The Bureau of Labor Statistics reported that, in June, the U.S. economy created about 112,000 new jobs nationwide. I've been amazed that some have stated that since this number was less than half of that projected for new jobs, that somehow this is an indication that our economy is headed back into recession again.

For the record, how do you view these lower-than-expected job figures?

MR. GREENSPAN: Senator, we have approximately 130 million people on payrolls in this country. And I am surprised that we can estimate the change from month to month as accurately as we do. The range of error is really quite large.

I know a number of people looked at those data and took it as some indication that there's some significant weakness developing. If that were the case, I think we would have seen it in a marked pick-up in initial claims for unemployment insurance, which, of course, we have not, and all of the other qualitative indicators we have currently in the third quarter suggest that employment is continuing to expand. And, indeed, while there has been weakness in June-and a number of your colleagues have mentioned this-I might say that July seems to be somewhat better, even though we are going through a soft patch. Motor vehicle sales, which, for example, were an important part of the weakness in the June retail sales data, at least so far as the first 10 days were concerned, shows a very significant snap-back largely because of-discounts have been expanded again. And our anecdotal data on new orders arriving during the month of July showed that the system's holding up. There is no real underlying evidence of any cumulative weakness here. It is none-it is nonetheless the case that the little bulge in inflationary pressure seems to have put-created a soft patch here, and it is something obviously we are watching very closely.

SEN. DOLE: Just one further question. Recently some have asserted that most of the new jobs being created in the last year are paying an average $1,500 to $9,000 less than those jobs lost over the past few years. Obviously, often an unemployed person finds a new job, they may be at a lower salary for a short time. But does your analysis show that the current jobs being created are basically lower- wage jobs with little or no benefits?

MR. GREENSPAN: The answer is no, but let me say that there are several different statistics that I think are important. The one that you cite is an important fact, namely, that people who do lose their jobs tend to have difficulty restoring the level of their original wage for quite a while. And that's part of the process which goes on in the very significant churning in the labor market. We have looked at this question in the broader sense is are we essentially downgrading the types of jobs that are being created, say, over the past year, and the answer is we find very little evidence of it.

There are essentially two ways to interpret how one should evaluate this. One is look at the question as to whether the growth in jobs are disproportionately in industries where the average wage rate is higher than the average for the economy as a whole.

There seems to be a slight indication of a decline in that regard, meaning more workers going into industries with slightly below nationwide average earnings.

On the other hand, when we look at it in the context of occupation, where clearly one gets a sense of what is happening to particular types of job slots, the answer is exactly in the opposite direction.

These are not contradictory. In other words, you can have a increasing spread within industries where there's a greater skill dispersion, while still having the average of the industry go down. But the bottom line in all of this is these data are so marginal that the conclusion that there is anything going on but what-other than just average expectation of changes in jobs, does not seem, in our judgment, to be supported by the underlying data which is broadly available.

SEN. DOLE: Thank you, Mr. Chairman.