The LMC Construction Industry Committee benefitted from a frank and fascination discussion with Esther George, President of the Federal Reserve Bank of Kansas City, at its May 11, 2012 meeting at Mark One Electric Co., Inc.
George, who succeeded Tom Hoenig last fall, expressed her commitment to keeping in touch with business and labor leaders throughout the Kansas City Fed’s region, and to bringing that perspective to the Fed’s Open Market Committee. She noted that the committee includes both regional Fed presidents, chosen by those banks’ boards, and Presidential appointees for a unique mix of national and regional perspectives. (Note: it appears that the U.S. Senate will vote soon on the next two Presidential appointees to the national board)
The economy is recovering steadily but slowly, George said, reflecting the depth and nature of the recession. She pegged an expected growth rate of about 2.5% for the remainder of the year, positive though not enough to fully restore employment. Consumers in particular are still addressing relatively high leverage and while spending is improving that debt will limit growth. She also cited many comments of business uncertainty, including uncertainty about consumer spending, government tax and regulatory policies and energy cost trends.
While the trajectory is positive, George expressed concern about three threats to continued expansion: effects from the European attempt to address debt, fiscal policy (particularly if both automatic budget cuts and expiration of the Bush tax cuts hit as scheduled in 2013) and monetary policy (unintended consequences of a long period of zero interest rates). She noted that a key will be how the U.S. addresses its long-term debt issue, and the balance between cutting long-term debt while not contracting the economy in the short term.
George noted that the construction industry’s recovery is “tepid.” Positive signs exist and lending is opening up somewhat but it will require longer for construction demand to catch up with the rest of the economy, she estimated. Some banks more heavily involved in construction loans are taking longer to recover. Developers and contractors must be creative in generating financing, she said. Participants noted that the Kansas City construction industry is implementing creative means to reduce risk for users and financiers.
She also pointed out, and participants agreed, that appraisal values were lagging behind the market and limiting the ability to make loans.
A delegation from the Construction Committee met last summer with Hoeing, George and leaders of area banking industry. On the day of the meeting, it was announced that the federal government’s credit rating would get a downgrade. On this morning there were more revelations about the $2 billion trading loss by J.P. Morgan. George pointed out that banks were resisting rules being written to implement the Dodd-Frank reform bill and that the J.P. Morgan example showed both the importance of and the vagaries of implementing the Volker Rule.
Dodd-Frank also sets up procedures for addressing “too big to fail” institutions, but until that is tested no one knows if the will to actually close an institution will be there, she said. The system needs banks of a variety of sizes but some banks may be too big. She noted that her predecessor Hoenig was just getting started as vice chair of the FDIC to help address these issues.
Changing dynamics in the labor market are also slowing recovery, George said. She agreed with a questioner that the way employment statistics are reported does not always reflect reality.
Regardless of the Supreme Court decision on the Affordable Health Care Act, she added, the U.S. must address health care with real changes. George pointed out tat the relationship between what is spent and the results lags the rest of the world, and demographics dictate increasing demand in the future.
After the bank president left, the full room of participants expressed confidence in her leadership and her willingness to listen and discuss issues with the committee.
