Statement by Cathy E. Minehan, President, Federal Reserve Bank of Boston, before the Subcommittee on Consumer Credit and Insurance of the Committee on Banking, Finance and Urban Affairs, U.S. House of Representatives, October 12, 1994, in Boston, Massachusetts - Statements to the Congress - Transcript

Federal Reserve Bulletin, Dec, 1994

Consumer reticence undoubtedly relates to the fact that the recession here was long and deep. In Massachusetts, payroll employment started falling in early 1989, more than a year ahead of the nation. Between the end of 1988 and the summer of 1992, payroll employment in our state fell 11 percent. Nationally, the decline was less than 2 percent. So although we have had a reasonably good recovery in Massachusetts, payroll employment remains below its previous peak. In contrast, the national economy has fully recovered and is now in an expansionary phase.

The composition of employment growth also differs from that in a normal New England recovery, and this difference has contributed to skepticism about the recovery. Growth has been dominated by services. Manufacturing, which historically played a major role in powering recoveries, has not on net been a source of new jobs in Massachusetts. Manufacturing employment certainly declined in the recession, and although it has grown a little over the past five months, some of our companies are still cutting their work forces.

This pattern has a number of implications. First, it raises questions about job quality. Some of the very highest paying jobs are in services. But there are also a lot of low-paying jobs. Moreover, the skills needed to earn high wages in services are not necessarily the ones that led to high pay in manufacturing; so even if the jobs are equally good, the people who get the good jobs may not be the same.

Additionally, manufacturing firms tend to be larger than services companies. Thus, employment cuts at manufacturing firms involve large numbers of people and tend to be widely publicized. Indeed, at least in New England, some of the companies that have been cutting back were, in the past, beacons of technical progress or innovation. Their continued difficulties are a blow to the collective self-confidence of the region. Moreover, Massachusetts residents are also aware that cuts in defense spending and market pressures on health costs have been, and will continue to be, more strongly felt here in terms of permanent job losses. In contrast, the growth that is occurring is highly dispersed and not very visible--a few jobs here, a few jobs there. As a consequence, people are acutely conscious of what is going wrong but not of what is going right.

Let me now turn to the role of interest rates and economic growth. Back in January, the federal funds rate was 3.0 percent, the prime was 6.0 percent, and the rate on fixed rate mortgages was about 7.0 percent. Today those rates are 4.75 percent, 7.75 percent, and roughly 9.0 percent respectively. The economies of Massachusetts and the nation have had sufficient momentum to move forward despite the interest rate increases. And if the national economy continues to expand--as most analysts believe it will in 1995--the Massachusetts economy and the economies of the other New England states should follow. Moreover, to the extent that national monetary policy is successful in promoting solid, noninflationary growth for the nation as a whole, addressing the region's long-term structural trends may be easier.