By Steven K. Beckner
Market News International - Some FOMC members also saw "considerable downside risks," say the minutes but they go on to outline the fairly optimistic thinking of Fed governors and presidents in producing a central tendency forecast for 2-2.5% real GDP growth this year.
Retail sales had been "disappointing" in late 2000, but "there was some evidence that sales had stabilized and possibly risen slightly in January," the minutes say in characterizing the members' discussion. Members cited negative forces affecting consumption, including "adverse wealth effects of the decrease in stock market valuations, relatively high consumer debt service burdens and possible retrenchment by consumers after an extended period of large increases in purchases and related buildups of consumer durables."
"Nonetheless, in the absence of possible developments leading to further deterioration in consumer sentiment, the members saw reasonable prospects for strengthening consumer spending this year even assuming some decline in such expenditures relative to income," the minutes add. "An important factor in this outlook was the expectation of some reduction in energy prices, which would boost disposable incomes available for non-energy expenditures and likely provide a fillip to consumer sentiment in the process."
"Moreover, with the relatively high rate of growth in structural productivity showing little or no signs of waning, the longer-run prospects for household incomes remained positive," the minutes continue. "On balance, the various factors weighing on the outlook for consumer spending later this year seemed favorable, though substantial downside risks clearly would persist for some interim period of uncertain duration."
Similarly, the FOMC was looking ahead toward stronger business spending, the minutes indicate. In the near-term, members believed, "the depressing effects of lagging final sales on business investment spending, notably for equipment and software, were reinforced by deterioration in the financial balance sheets of some business firms, tighter supply conditions in segments of the credit markets, and a buildup in excess capacity that had eroded profitability."
And members observed that past "unsustainable rates of investment" had required many high-tech firms to "retrench."
But the minutes say FOMC members also took note that there had been "little evidence of the substantial overbuilding that had characterized the construction industry in earlier periods." Moreover, the general feeling was that "against the background of large continuing gains in structural productivity and cost savings from further investment in equipment and software, business firms were likely to accelerate their spending for new capital after a period of adjustment."
The FOMC was uncertain about the duration of the inventory adjustment process, but "a number of members commented that they expected a period of inventory correction that would be relatively sharp but short by historical standards," the minutes say.