Speech

Our Economic Prospects: One Economist’s Perspective RiskManagementAssociation Evansville,Indiana September20,2001 On September 10, the U.S. economy THE ECONOMY AS OF LABOR was limping along but with the DAY promise of faster growth before too long.Thenextmorning,wesuffered Asthecountrymadeitsusualtransitionfrom grievous and vicious terrorist attacks. It is too summervacationstoautumn’sback-to-worksea- early to speak with any confidence about the son,theU.S.economywasgrowingslowly,ifat likely short-run economic effects of the attacks. all.Let’sbeginouranalysisbyasking:Whathap- Tonight, I want to share with you my conviction penedto2001?Whatcanwesayaboutwhythe that our long-run prospects, though changed in economywaslimpingalong?Thisanalysisis detail, remain bright and unchanged in funda- highlyrelevanttoourcurrentprospectsbecause mentals. I also want to speak in quite general whatwewillobserveincomingquarterswillbe terms about the short run. Our economy is amixtureofadjustmentsflowingfromthestate resilient, both because our people are resilient oftheeconomyasofLaborDayandadjustments and because we rely so greatly on decentralized fromthetragiceventsofSeptember11. markets. These markets will assist us in reallo- Thisyear’sslowdownhasbeenatypical,an cating our economic resources in ways that will unusualmixtureofreasonablystronghousehold deal effectively with the new realities we face. demandandextremelyweakbusinessinvestment BeforeproceedingIwanttoemphasizethat spending.Corporateprofitshavefallenatalmost theviewsIexpressaremineanddonotnecessar- a20percentrate.Businessinvestmentinequip- ilyreflectofficialFederalReservepositions.I mentandsoftware,whichhadgrownatdouble- thankmycolleaguesattheFederalReserveBank digitratesthroughthefirsthalfof2000,slowed ofSt.Louisfortheircomments.BobRasche, duringlastyear’sthirdquarterandhasdeclined Researchdirector,andDickAnderson,vicepresi- forthelastthreequarters.Afteradjustingforinfla- dentintheResearchdivision,wereespeciallyhelp- tion,businessdemandforinformation-processing ful.However,Iretainfullresponsibilityforerrors. equipmenthadgrownata16percentannualrate Inassessingourshort-runprospects,weneed fromthefirstquarterof1992totheendoflast tounderstandthespecialfeaturesofthepre-attack year.Thisyear,thatdemandfellatanannualrate economyandthenexaminethelikelyeffectsflow- ofmorethan12percentinthefirstquarterand ingfromtheeventsofSeptember11.Iwillnot almost20percentduringthesecondquarter.The attempttoprovideanydetailontheshort-run outlook,forIdonotbelievethatanyeconomist speedoftheslowdowninbusinessinvestment canhavegreatconfidenceindetailedassessments. demandhasleftmanyfirms,especiallyinthe WhatI’mgoingtodoinsteadisoutlinethemajor telecommunicationsandhigh-techsectors,with considerationsasIseethem.Ihopethatthisframe- significantexcessinventory.Contributingtothe workwillproveusefulinthinkingaboutdevelop- slowdownmaybethefactthattherelatively mentsastheyoccur. youngageofbusinesscapitalequipment,dueto 1 ECONOMICOUTLOOK therapidpaceofinvestment,makesitlesscostly toreturninventoriestoanormallevelrelativeto todeferreplacement. sales. Manufacturing,especiallytelecommunica- Althoughrealconsumerspendingremained tionsandelectronicequipment,hasbornethe reasonablystrongthroughAugust,ithadslowed bruntofthefall—butasofLaborDaytherewere fromthepaceofrecentyears.Duringboth1998 somesignsofemergingweaknessfortheentire and1999,measuredfromfourthquartertofourth nonfarmbusinesssector.Duringthesecond quarter,realconsumerspendingincreasedapproxi- quarter,hoursworkedfellatasharp2.6percent mately5percent.During2000,spendinggrowth annualrate,thelargestsincethetroughofthe slowedtoa4.2percentpace.Thisyear,spending lastrecessionduringthefirstquarterof1991. deceleratedtoa3.0percentrateduringthefirst Smoothingthroughquarterlyfluctuations,since quarteranda2.2percentpaceduringthethird. thefourthquarteroflastyear,outputinthenon- Despitedecreasesinequitypricesthathave farmbusinesssectorisapproximatelyflatand reducedtheratioofhouseholdwealthtoincome, totalhoursworkeddownonlyslightly. theratioremainssignificantlyaboveitspre-1995 Unlikebusinessspending,householdspend- level.But,ontheothersideoftheirbalancesheet, inghascontinuedtogrowmoderatelythisyear, householdsalsohaveagreatdealofdebt;debt- despitebeingbuffetedbychangesinincome, servicepaymentsremainhighrelativetohouse- wealthandconsumerconfidence.Although holdincome. unemploymenthasincreased,labormarkets Fromasomewhatlongerperspective,the throughAugustremainedfavorableforworkers; recentslowingofaggregatehouseholddemand employmentlevelsremainedrelativelyhighand broadlyresemblesitsbehaviorduringprevious realearningscontinuedtoincrease.Compensation economicslowdowns.Duringthetwoyearsprior perhourinthenonfarmbusinesssectorduring tothebusinesscyclepeakinJuly1990,realper- thesecondquarterincreasedata4.8percent sonalconsumptionexpenditures,onafourth- annualrateafterincreasingata5.1percentpace quartertofourth-quarterbasis,increased4½ duringthefirstquarter. percentduring1988and2percentduring1989. Demandforlightmotorvehiclesandhousing PriortotheDecember1969cyclicalpeak,real hasbeenrobust,withrecordornearrecordsales expendituresincreased6½percentduring1968 ratesinbothmarkets.Theinventoryofcompleted and3percentduring1969.PriortotheApril1960 homesremainedlow.Althoughlonger-terminter- peak,realexpendituresincreased4¾percent estrateshavefallenlittlethisyear,lastyear’s during1959,andthen2percentduring1960. largedecreasesleftmortgageratesatperceived Thisyear’sslowdowninaggregateconsumption bargainlevels.FromhighsinMay2000,conven- expenditures,then,isnotoutoflinewithprevi- tional30-yearmortgagerateshavedecreasedby ousperiodsofslowingconsumption. approximately1½percentagepoints.Existing- When,however,weexamineconsumer homesaleshaveremainedata5.2millionunit expendituresinmoredetail,currentexperience annualratesinceJanuary1999.Privatehousing startsremainabovea1.6millionpace,withsome isatypical.Becauseinterestrateshaveremained buildersreportinglowinventoryandsubstantial relativelylowduringthisslowdown,spending orderbacklogs.Inaddition,despitesomefluctu- ondurablegoodsincludinglightvehicleshas ations,lightmotorvehiclesaleshaveheldupwell. slowedconsiderablylessthanmightbeexpected SalesinAugust,ata16.4millionunitpace,were fromhistoricalexperience.Purchasesofdurables comparabletothestrongpaceoflate1998and increased5.3percentduring2000(fourthquarter early1999,althoughslowerthantherateof17.5 tofourthquarter),slowerthanitsgrowthratesof millionunitssoldduringthesamemonthlast 12.7percentduring1998and11.3percentduring year.Themodestslowdowninlightvehiclesales 1999.PriortoJuly1990,however,thenumbers didcreateaninventorybuilduplastwinter,but weremuchworse:a0.4percentdecreaseduring theindustryrespondedquicklyandeffectively 1989followinga6.3percentincreaseduring 2 OurEconomicProspects:OneEconomist’sPerspective 1988.Duringtherecessionyearof1990itself, Onefactor—“thedogthatdidn’tbark”—is durablespurchasescontractedby3.5percent.If theabsenceofinflation.Pastcyclicaldownturns wegobackfurther,asimilarpatternisevident havebeencharacterized,almostasasignature, priortotheDecember1969cyclicalpeak.The byanaccelerationofinflationpriortoacyclical recentexperienceisn’tnearlyasweak. peakeitherduetoasupplyshock(suchassharply But,lookingforward,somecautionwasin higherenergyprices)oroverlyexpansivemone- orderevenasofLaborDay.Consumerconfidence tarypolicythatcontributedtoaggregatedemand hadfallensignificantly,andmanyanalyststhought growingmorerapidlythansupply.In2001,I fallingequitypricesmightdepressspending.It believeanincreaseintherateofinflationwas wasnotunreasonabletoexpectthataweaken- forestalledbythepreemptivemonetarypolicy inglabormarketmightalsoaffectspendingin tighteningthatbeganinmid-1999. themonthsfollowingLaborDay.Firmshad Insummary,theeconomyasofLaborDaywas announcedthelayoffofmorethan1million characterizedbyaweakmanufacturingsector, workerssofarthisyear.Manufacturingemploy- ledbyatechdownturnofmajorproportions. mentisdownfromoneyearagoby940,000.Non- However,consumptionspendingandhousing farmprivatepayrollemployment,althoughgreater wereholdingupverywell.Notablewerecontin- thanoneyearago,hasdecreasedonaverageby uinggoodsalesofconsumerdurables,especially 106,000permonthsinceApril,apacetypicalfor autosandlighttrucks,andarobusthousingmarket. theearlystagesofaneconomicslowdown.For Households,andthefirmsthatlendtothem, households,theBureauofLaborStatisticsAugust apparentlyhadafavorableoutlookforthefuture, surveyshowedadecreaseinemploymentof1 forotherwisetheywouldnothavebeenassuming million.Netofthe400,000whoceasedlooking theselargefinancialcommitments. forworkandhencearenolongerclassifiedas unemployed,theoverallunemploymentrate jumpedto4.9percent. ADJUSTMENTS TO COME AlthoughtheAugustlabormarketreportwas Thedeclineinspendingonhigh-techequip- dismal,someanalystsquestionedtheestimates, mentandsoftwarewillendatsomepoint,and notingthatanunusuallylargenumberofteenagers growthwillresume.Idonotknowwhenthe becameunemployed.Thatfactraisesconcern recoverywillbegin;nordoIknowhowvigorous regardingtheaccuracyofseasonal-adjustment therevivalwillbe.Certainlytheoutlookmay factorsasschoolsopenedinAugust.Aggregate havechangedsomewhatfromtheviewasofLabor hoursfornonfarmprivatepayrollemployees Day,whichwasareasonableexpectationofa shrankonly0.4percentduringAugust,lowrela- revivalinthefourthquarterofthisyear. tivetopriorslowdowns;formanufacturing,hours Weshouldnote,however,thatthecurrent decreased1.3percent.Newclaimsforunemploy- capital-adjustmentprocessisnotanewphenom- mentinsurancehavebeenrelativelyhigh—near enonineconomics.Economistshavestudied orabove400,000perweeksinceApril—but thesemattersinconsiderabledetail.Oneofthe appearedtohavestabilized. oldestideasinmacroeconomicsisthatbusiness Inadditiontoashiftinbusinessoptimism, investmentspendingdependsonexpectationsof causesfortheslowdownthisyearlikelyinclude futuresalesandprofits.InhisGeneralTheory, higherenergyprices,lowerequityprices,tighter forexample,JohnMaynardKeynesnotedthatit creditstandards(bothatbanksandinprivate wasimpossibletoassesstherateofreturnonan placements),andslowereconomicactivityover- investmentprojectuntiloneknewexpectations seas.Sortingouttheinteractionsamongthese offutureeconomicconditions.Further,incom- factorswillkeepeconomistswellemployedfor mentsthatforeshadowedthedot-comIPOphe- severalyears. nomenonofthe1990s,Keynesobservedthat 3 ECONOMICOUTLOOK excessiveinvestment(“overinvestment”)islikely oneknowshowlongtheseeffectswillpersist. tooccurifthesharesinanewfirmcanbesold Whatwedoknowisthatmarketswilldoagood inanequitymarketformorethanthecostofthe jobinreallocatingresources.Iamnotsayingthat investment.Inthismanner,expectationscanbe theaffectedindustrieswillnotsuffergreatpain; self-fulfillingandreinforcing.Ashiftinsentiment Iamsayingthattheeconomyasawholeneed tomalaisecanbringaveryabrupthalttothebusi- not,andIbelievewillnot,suffergreatpain. nessinvestmentboom. Resources—bothcapitalandlabor—willflow Itisunlikelythatexcessinvestmentoptimism, fromsomeindustriestootheronesandtheaggre- followedbytheshiftinsentiment,accountsfor gateeconomywillgrow. allofthe2001economicslowdownintheUnited States.But,itseemsclearthatthetechreversal hasplayedamajorrole.WhatIthinkisnotable THE LONG-RUN OUTLOOK isnotthatoverallgrowthslowedbutinsteadthat ItismyconvictionthattheU.S.economy arecessionhadapparentlybeenavoidedasof containsverypowerfulforcespromotinggrowth LaborDay. andfullemployment.Oursocietyrewardsentre- Whyhadthetechtumblenotspilledoverto preneursandinnovators.Wearemuchbetteroff therestoftheeconomytoasignificantdegree? livinginasocietywherepeoplemaybesome- Threefactorswereatwork.First,withoutquestion, timesexcessivelyexuberant—assomemayhave monetarypolicyeasingstartinginJanuaryplayed beeninthelate1990s—thanoneinwhichfew animportantrole.Second,interestratesfelllast arepreparedandabletotakerisks.Ourstrengths year,reflectingareductionincreditdemandsto includearesilientpeople,efficientmarkets,and financetechexpansionandanticipationsoffuture lowinflation.TheFederalReservehasmadeclear monetarypolicyeasing.Theseratedeclineswere formanyyearsitscommitmenttomaintaining importantinsustaininghousingactivityand lowinflation,andthatcommitmentiswidely householddemandforconsumerdurablegoods believedinthefinancialmarkets.Letmetalk thisyear.Third,andperhapsmostimportantof brieflyabouteachoftheselong-runstrengths. all,widespreadoptimismaboutthelonger-run Ourcultureandinstitutionsrewardentre- courseoftheeconomysustainedspendingona preneurialactivity.Theyareintact,completely widerangeofgoods.Peoplesaw,Ibelievecor- undiminishedbythetragedyofSeptember11. rectly,thatthetechtroubleswerelikelytobe Peoplearemotivatedbytheintellectualandfinan- temporary.By“temporary”Imeanthatthedura- tionoftheproblemwasmeasuredinquarters cialrewardsofbuildingcompaniesandserving ratherthanyears. markets.Theywillbelookingforopportunities Itisveryimportantthatwemaintainalong- tomovetheU.S.economyforward.Government runperspective.Yearsfromnow,itwillbeof policiesandthestructureofourlaborandcapital interesttoeconomists,butfewothers,justhow marketsenableentrepreneurstobesuccessful. manyquartersittooktomovealongtheadjust- Thoseconditionsareinplace,undepreciated. mentcurve.ThebasicfactisthattheU.S.econ- Amarketsystemworksmosteffectivelywhen omyallocatesresourcesacrossallthedifferent pricesignalsarenotconfusedbyinflationary typesandvarietiesofgoodsandservicesthrough expectations.Thereisnoevidencethatbehavior highlycompetitivemarkets.Thesemarketsare sinceSeptember11hasbeenmotivatedbyfear veryefficientinadjustingtochangingdemand ofinflation.Wesawafewlinesatgasstations andsupplyconditions. Tuesdayoflastweek,basedonunfoundedfears Letmenowapplythissameanalysistothe ofaphysicalshortageratherthanafearofsharply situationwefaceinthewakeofSeptember11. higherprices.Iemphasizethispointbecausein Clearly,theairlineandhotelindustries,and previouscrises—theoutbreakoftheKoreanWar relatedservices,havebeengreatlyaffected.No isaclearexample—fearofrisingpricesconsider- 4 OurEconomicProspects:OneEconomist’sPerspective ablycomplicatedthesituation.Thatwetakeprice stabilityalmostforgrantedisagreatstrengthof ourcurrentcondition.Equallyimportant,amarket economyrequiresthathouseholdsandfirmsbe abletomakeandreceivepaymentsreliably.The Fedprovidedahugeamountofliquiditythrough variouschannelsandmadecashreadilyavailable sobankscouldkeeptheirATMsstocked.Inthese andotherways,theFederalReservelaboredlong, hard,andeffectivelysinceSeptember11tokeep thepaymentssystemworking.Wesucceeded. I’veemphasizedthatnear-termadjustments arealreadyoccurringinresponsetothetech tumbleandnowalso,evenmoreimportantly,in responsetotheeventsofSeptember11.These adjustmentsneednothaveamajorpersisting aggregateeconomicimpact.Letmeuseasailing analogy,drawnfrommymanyyearsofsailing smallboats.IknowtheracingmarkIhavetogo around,butsometimesgetpushedoffcourseby anadversewindshiftorsquall.Thoseshort-run eventsdonotpreventmefromreachingmyobjec- tive,althoughtheymaymakemypassageslower. ThenaturalstateoftheU.S.economyisgrowth andfullemployment.We’llgetthere. Idonotwanttominimizethesizeofthecur- rentshock;Idowanttocautionagainstmaximiz- ingit.Theeconomyhaspushedaheadfollowing previousshocks.Inmypersonalexperience,I thinkbacktotheKoreanWar,theCubanMissile Crisis,theKennedyassassination,andother shocks.Iwillnottrytorankthemagainstthe currentsituation.ButIamconfident,givenour priorexperience,givenoureconomy’scharacter- isticsandthecharacteristicsofourpeople,the economywillbefine.Wewillgetbackoncourse beforetoolong. 5

William Poole (2001, September 19). Speech. Speeches, Federal Reserve. https://whenthefedspeaks.com/doc/speech_20010920_poole

@misc{wtfs_speech_20010920_poole,
  author = {William Poole},
  title = {Speech},
  year = {2001},
  month = {Sep},
  howpublished = {Speeches, Federal Reserve},
  url = {https://whenthefedspeaks.com/doc/speech_20010920_poole},
  note = {Retrieved via When the Fed Speaks corpus}
}