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2002 Annual Report


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2002 Annual Report
Last Updated: 04/04/02
Letter from the President

The year 2002, following the events of 9/11, was marked by increased geopolitical risk and greater uncertainty in the economy. American business also was profoundly shaken by accounting improprieties and failures in corporate governance that resulted in the collapse of several major companies — adversely affecting employees and shareholders. This had a chilling effect, making many firms hesitant to hire or to invest. Further, to the extent that general uncertainty depressed the stock market, the dent in household wealth was most likely a negative factor for consumer spending.

 

But, even under these circumstances, the economy held up remarkably well—with real GDP rising 2.9 percent over the year, and with inflation remaining low and well contained. (Real GDP is the broadest measure of national output adjusted for inflation.) One benefit of the low inflation was that it allowed monetary policy to maintain an accommodative stance. Indeed, the Federal Open Market Committee lowered its federal funds rate target to 11/4 percent—the lowest the actual federal funds rate has been in 41 years. This helped bolster demand throughout the economy.

 

In addition, household incomes continued to rise throughout 2002. Fiscal policy helped in this regard. But, importantly, growth in real household income has been supported by strong gains in productivity. Indeed, the fact that the outlook for productivity—a major determinant of growth in real wages and real corporate profits over time—has remained strong, suggests that economic fundamentals are still sound.

 

Midwest auto industry plays key role in national economy A notable player in the economy’s performance last year was the auto sector—based largely in the Seventh Federal Reserve District served by the Chicago Fed, which includes most of Illinois, Indiana, Michigan and Wisconsin, plus all of Iowa. Motor vehicle output alone accounts for more than 3 percent of GDP. Over the year 2002, it increased 9.1 percent compared with overall economic growth of 2.9 percent. Even more significant, when the economy was virtually flat in 2001, motor vehicle output was up 5.6 percent.

 

This performance provided a substantial lift to a struggling economy. In doing so, it ran counter to the industry’s record in prior economic slowdowns. That is to say, when the overall economy slowed down, the auto sector traditionally slowed even more.

 

Whether recent behavior is the beginning of a new trend is one of many timely questions we address in this year’s annual report, entitled “Driving the Future: The Auto Industry at a Crossroads.” A four-part essay, focusing on the role of the auto industry nationally and in our region, begins on page 3.

 

Impact of shift to electronic payments

Another important development is that consumers and businesses have been substituting electronic payments— made through debit cards, credit cards and the Internet—for paper checks. This development is good news for the nation’s payments system, and something the Federal Reserve has actively encouraged. But it’s accelerated a decline in the volume of checks processed by the Reserve Banks, forcing us to make changes to recover the costs of payment services, as we’re required to do by law.

 

Over the next two years, the 12 Reserve Banks will increase efficiency nationwide by reducing the number of check processing sites from 45 to 32 and the number of offices processing check adjustments from 43 to 12. Three Seventh District offices—Indianapolis, Milwaukee and Peoria— will be consolidated into other sites. Unfortunately, this means that positions are being eliminated throughout our District and the System. These decisions reflect the need to address these challenges as a System to position us most effectively for the future.

 

2002 results were commendable

Despite declining check volumes, Seventh District Financial Services contributed the second-highest check net revenue to the System in 2002 and significantly increased our local net revenue performance over 2001. In Detroit, we will be building a new branch facility that will address current and future needs by improving security, vault space and check processing efficiency. We’ve also been busy developing stronger customer relationships that tailor specific products to specific customers. In a notable success, our Des Moines office made the largest single sale of check services in the System’s history.

 

Economic Research had another outstanding year in its efforts to produce timely, independent and innovative policy-relevant research. A significant 2002 achievement was the December opening of the Chicago Census Research Data Center, located at the Chicago Fed. The center is a joint partnership between the United States Census Bureau and a consortium of institutions including the Bank. It will enable researchers with projects approved by the Census Bureau to study a variety of important economic questions using highly detailed census data while safeguarding confidentiality.

 

In 2002, Supervision and Regulation sharpened its focus on core bank supervisory responsibilities in response to a more challenging business environment with more complex institutions to supervise. This included increasing staff levels and working to strengthen their expertise.

 

Overall, we continued to manage District costs to align them with revenue in both the short and long term. We lowered costs significantly through controlling expenses, resizing and realigning staff, and matching support services with demand.

 

We also implemented measures to ensure the continuity of Bank operations in an emergency situation and enhance the security and safety of our people. A business continuity office was created, and protection officers were certified under the new federal law enforcement authority.

 

Throughout these challenging times, senior management has communicated with employees frequently to discuss key issues and solicit their ideas for new and better ways to conduct business.

 

Appreciation for our employees and directors

When times are tough, it’s especially important to reiterate how much we appreciate our staff. Employees have demonstrated great flexibility, and we are grateful for their willingness to adapt further as our organization changes.

 

We also appreciate the support of our directors, whose advice and counsel are invaluable as we finetune our strategy to meet new challenges.

 

During 2002, we also welcomed three new directors: Miles White, chairman and chief executive officer of Abbott Laboratories, joined the Chicago Fed board; and Bob Churchill, chairman and chief executive officer of Citizens National Bank, and Irvin Reid, president of Wayne State University, joined the Detroit Branch board.

 

Working together as a dedicated team of employees, officers and directors, we improved results in 2002 and have set the stage for stronger performance in 2003 and beyond.

 

Michael H. Moskow
President and Chief Executive Officer

March 3, 2003