Cathy Minehan is the president and chief executive officer of the Federal Reserve Bank in Boston.

The Providence Journal / Mary Murphy Mary Murphy

PROVIDENCE — Developers are transforming downtown Providence and company payrolls are still growing, albeit slowly. So officials of the Federal Reserve Bank of Boston said yesterday they were surprised to learn that Rhode Island business leaders sounded somewhat pessimistic about the local economy.

“The general tone was not that upbeat,” said the Boston Fed’s executive vice president and economic advisor, Lynne E. Browne. “I was really surprised more about the pessimism around the economy.”

The spike in home foreclosures, the lack of affordable housing, the state budget deficit and the inability of the state to keep its college students from leaving after graduation were chief among the concerns discussed by the 35 or so business people who attended a private breakfast meeting at the University Club on Benefit Street with the Fed executives.

“People were, on average, moderate to somewhat less than moderate about the prospects for the Rhode Island economy,” the Boston Fed’s president and chief executive officer, Cathy E. Minehan, said during an interview after the meeting. Among the concerns discussed were:

Home Foreclosures: Pages upon pages of legal foreclosure notices in Saturday’s Providence Journal, Minehan said, “struck a cord” with many of those who attended the meeting.

The surge in Rhode Island, as in other states, Minehan said, is concentrated among a limited group: mostly “subprime” borrowers, or people with credit problems, and people with adjustable-rate mortgages. But the people who lose their homes to foreclosures, she cautioned, are not the only ones who may be affected.

“It spills over to neighbors,” Minehan said, “who now find the value of their house is depressed.”

Then again, so long as those neighbors are not faced with huge health-care problems, divorces or other crises that force them to sell their houses, Minehan said, they will probably “stay in their home and ride it through.”

Affordable Housing: “You can’t have anyone go around New England and not hear people talk about affordable housing,” Minehan said. The main reason, she said, is limited land and the high price of house lots. “It’s not like Las Vegas,” she said. “You can add to it on the margins” with affordable building incentive programs “but not much more.”

About 15 percent of U.S. households – and 17 percent of Rhode Island households – spent more than half of their income on housing in 2005, according to a report released yesterday by Harvard University’s Joint Center for Housing Studies.

Minehan declined to comment on the findings, saying she hadn’t seen the report.

“I think it’s fair to say that, yes, there are some low-income families who are challenged by debt,” said Jeffrey C. Fuhrer, the Boston Fed’s executive vice president and director of research.

The solution to that problem, he said, is “basic financial literacy.” He added that income inequality is an issue for federal legislators and the treasury and is “not something the Fed as policy looks to address.”

Income inequality is viewed by some as a “side effect of policies that are growth-producing,” said Browne, the Boston Fed’s economic advisor.

College graduates: The problem of college graduates leaving Rhode Island is something that business leaders could do more to address, said Browne. The “mantra” among business leaders, she said, has been that they cannot find enough well-trained recruits in Rhode Island.

“How aggressively are Rhode Island companies recruiting them?” Browne said. “You have the highest number of enrolled students [in the country] after Massachusetts. You have a great resource there and Rhode Island companies should be recruiting very aggressively.”

But business leaders say the high cost of housing is one reason preventing the best and brightest from staying in Rhode Island.

“When kids are coming out of college,” Browne said, simply, “they’re not looking to buy a house; they’re looking to rent.”

Laurie White, president of the Greater Providence Chamber of Commerce, who attended the meeting, said that view is well taken and “something the chamber is working on.” Rhode Island needs to have a “much more aggressive system” for developing internships which will showcase the opportunities here and connect college students with employers.

In addition to housing, other concerns raised at the meeting, White said, included the state budget deficit and income taxes.

larditi@projo.com