Seeking Signs of Strength
Dallas Fed chief has his eye out for evidence of a turnaround
A healthier labor market would be welcome news for economy, he says
by Angela Shah
Dallas Morning News
Aug. 7, 2003

Much as the rest of the country, Dallas Fed chief Robert McTeer is looking for evidence of an economy that's rebounding in earnest.

And a positive labor market bodes well for a more robust recovery. That, economists say, would signal that businesses believe the sluggish economic recovery is picking up steam.

"New claims for unemployment insurance ... have been under 400,000 for two weeks now," Dr. McTeer said. "And if that happens another time or two, I think we can be pretty sure that the next employment number is going to be positive."

U.S. businesses have yet to start adding to payrolls. Instead, many are sending an increasing number of jobs overseas, where labor is cheaper.

But that's all part of the economic churn, said Dr. McTeer during an interview with Dallas Morning News reporters and editors this week.

"We shouldn't be trying to stop the flow of jobs abroad," he explained. "When we start trying to isolate ourselves from competition worldwide, we'll lose our dynamism."

Nevertheless, he acknowledged, "it's kind of hard to see so many jobs going abroad that look like they'll never come back."

The Fed president also weighed in on topics including the lingering effects of the tech bust in North Texas and his moment in the limelight with actress Elizabeth Hurley.

Here are a few excerpts:

Question: Last week, the economic data seemed to show signs that we had turned the corner. But the labor report didn't support that. Is this rebound stalling?

Answer: I think the rebound sort of started stalling a little bit earlier, in that it got off to a reasonably good start ... but then we had two 1.4 percent [GDP growth] reports in the last quarters of '02 and the first quarter ... I was interviewed several times before the GDP number came out, and I'm thankful nobody asked me what it was going to be because I would have said it would be 1.4 percent. It turned out to be 2.4, so that was very hopeful even though we were already a month past the end of that quarter.

I think what's been going on lately is simply that productivity has continued to grow fairly rapidly and so we're getting output growth.

Question: What about the idea that the unemployment rate is a fairly imperfect indicator of economic health. ... What are the economic indicators you turn to?

Answer: GDP is the number that I hang my hat on. It's not a good straw-in-the-wind indicator, but it's a good comprehensive indicator of how the economy's doing.

Question: Wasn't this sort of a vicious cycle: We're not going to grow jobs until businesses feel confident? But if their customers are these people who are worried about their jobs...

Answer: [The National Bureau of Economic Research] was very inconsistent. They put the beginning of the recession in March 2001, even though the first quarter was negative. The reason they chose March was that was when the employment growth peaked.

They based the start of the recession on employment and they based the end of the recession on output. They jumped track.

Question: What about the regional economy? Are Dallas and Texas lagging the nation?

Answer: We were, I think. But I think we've caught up and passed [the nation] in terms of job growth.

This time, two or three things that we had going for us sort of petered out. One was trade with Mexico, which is about four times as concentrated in Texas as it is in the nation. We got a cold and Mexico got pneumonia, so that ceased to be an engine of growth for us.

High-tech manufacturing never was real big in Texas, but it was a big part of the Texas advantage: Texas Instruments, Dell, Compaq. And that suffered, so we lost that advantage.

We have three airlines headquartered in Texas. I guess they were all hurt by 9-11, even though one of them did much better than the others.

Question: Inflation, deflation, how closely does the Fed follow this?

Answer: We're aware that what inflation we have left in the economy is primarily services and goods that don't get traded much in international trade. But since we're aware of that we don't spend a lot of time talking about it.

The last two FOMC meetings and the press releases that were issued have become historic. ... Two meetings ago, the decision was not to change monetary policy, meaning not to change the target Fed funds rate.

However, for the first time, we sort of messed around with the wording of the bias statement and we separated out the prospects for the economy from prospects for inflation. And in doing so we came in with a downward bias on the inflation part.

Question: What about the housing industry?

Answer: I'm not an expert on it. Refinancings went on a long time and people got some really good rates and it was heaven. And then this backup in the 10-year bond apparently has cut the refinancings down by a third.

But maybe it's just been going on for so long that everybody who needs to refinance has already done so. It may be that it will be tough to keep housing activity going in the next several months.

Question: These [economic conditions have] been unusual in that we haven't seen demand on the consumer side go down at all. They're likely not going to be providing a real big boost at the beginning of the recovery. Are we stuck in a 2 percent to 3 percent recovery?

Answer: When I think of it by sector like you're making me do now, it feels pretty pessimistic because it's pretty easy to conclude that the consumer's been carrying this thing for so long that there can't be much left.

And it's going to be hard for business [spending] to come in and substitute for them.

But if I think about it another way, and think of all the reasons that the overall economy ought to pick up in growth—easy money, easy fiscal policy, a huge tax cut that's just now being implemented, a weaker dollar, a stronger stock market—all those things make me feel pretty positive.

Question: Outsourcing/offshoring, is this temporary cost-cutting?

Answer: There are these long-run secular forces that are operating that are affecting jobs as well. A lot of what we're seeing may be that rather than weakness in the economy.

Let the capital seek the labor and the labor seek the capital, and we're all better off. And that's true and I still believe it. But the "all" is the world, not necessarily the United States by itself.

Increasingly, labor and capital are sort of packaged together and moved together. They're not so separate anymore when you're talking about software jobs in India, and increasingly, software jobs in China....

China is still a very small economy in world trade but it's growing by leaps and bounds. Given their virtually unlimited supply of cheap labor that's still on the farm, waiting to come into town to go work at a factory, it's going to be a long time before they will lose any competitive advantage that goes along with low wages.

Question: Should we be concerned about [the deficit]?

Answer: We're allowed to take some comfort from that aspect of it—that relative to the economy, it's not as big as it used to be. I'd rather the deficit be smaller, and I'd rather have a surplus than a deficit.

I wouldn't want to see us get rid of the deficit with tax increases. I think that the tax cut that we have is a good thing. I think that when the economy gets growing again much more rapidly, that a lot of that future deficit will melt away.

Question: Considerable time has gone by now since March 2000, when the bubble collapsed. Looking back now, was there anything you wish the Fed had done to prevent that bubble?

Answer: It's just ingrained in central bankers in recent decades that they base monetary policy on the economy and not on the stock market.

I try to imagine what a press release will look like: "The FOMC met this morning, and we determined that inflation was under control; growth was at a good, high, sustainable rate; and the unemployment rate was stable at a low level. But we decided to tighten monetary policy in order to bring stock prices down because we thought they were excessive."

Question: What about raising the margin requirements?

Answer: I asked ...[Federal Reserve Chairman Alan Greenspan] that myself. He was absolutely convinced that raising margin requirements would not have worked under the modern system. ... The sophisticated people could easily get around them; it would only affect small purchasers.

But you know, I think if I had been chairman, God forbid, I would've done it, whether I thought they would work or not, because everybody was advocating it. It seemed such a logical thing to do. You've got this tool that's specifically designed for that. So why not use it? I have some sympathy for the critics on that.

Question: What do commodity prices tell you?

Answer: Steve Forbes ... told [an] audience that there's an easy way to tell whether Fed monetary policy is appropriate or not. The way you do it is you look at the price of gold.

If the price of gold is over $400 an ounce, they're too easy. If it's under $300 an ounce, they're too tight. I got on my Blackberry and I e-mailed my assistant, asking what the price of gold was, and it's $349. ... Hooray. ... A couple of days ago it had gone up to $364. It may be higher than that now. We have been pumping money out like crazy.

Question: Any plans to feature the Fed or yourself in another movie?

Answer: We'd need a better one this time. ... The great movie Serving Sarah, with Liz Hurley and Matthew Perry—it was set in Dallas. They wanted an office for Liz Hurley's husband that has a view of the Dallas skyline. ... They asked could they make an office set out of about half of our dining room.

We were doing them a lot of favors, so they told me I could have a little cameo appearance in the movie. ... I got to be with Liz Hurley long enough to get a good photograph with her.

Question: No future interest, though?

Answer: Oh, yeah, I'm a ham.

Reprinted with permission of The Dallas Morning News.