speeches · February 8, 2007
Speech
William Poole · President
State of the U.S. Economy
AAIMManagementAssociation
St.Louis,Missouri
February9,2007
Iam pleased to be here today to discuss THE BIG PICTURE
the state of the U.S. economy and the
TheU.S.economyisfundamentallysound.
near-term outlook. Despite some variabili-
Overthepastfewyears,surveysofbusiness
ty in quarterly growth rates last year, pri- economistsbytheNationalAssociationfor
marily related to declines in housing invest- BusinessEconomicshaveregularlypointedto
ment, the state of our economy looks good. The keysourcesofstrength.Theseincludeadynamic
U.S.economyishighlyproductive,profit-making andflexiblelabormarketandafinancialsystem
opportunitiesabound,interestratesandinflation thatrewardsinnovationandrisk-takingbychan-
are both relatively low and stable. The largest nelingcapitaltoitshighestratesofreturn.In
short,ourmarket-basedeconomyaffordsfirms
challengefacingtheUnitedStatesisnotthe
theabilityandtheincentivetoinnovateandto
business cycle but the task of adjusting on
adaptquicklytochangesinrelativedemandsfor
many fronts to the retirement of the baby boom
goodsandservices.Managementstodayrespond
generation. Fortunately, U.S. laws and institu-
promptlytovariousshocksthatrattletheecon-
tionswillenableustofacethesechallengeswith
omy.ThegrowingdynamismoftheU.S.economy
a greater deal of optimism than in some other
isnicelyillustratedbytheriseintheeconomy’s
countries that will face the demographic chal-
rateofproductivitygrowththatbeganaround
lenge sooner and in larger measure than we will.
1995—achangeofenormousimportance.Itdoes
Asbackgroundfordiscussingtheeconomic notyetappearthatthecurrentproductivity
outlookI’llstartbypresentingabird’s-eyeview boomhasrunitscourse.
ofrecentdevelopmentsintheU.S.economy, Theriseinproductivitygrowthhasincreased
includingthoseontheinflationfront.Although theeconomy’spotentialoutputgrowth.Atpresent,
mymaintopicisprospectsfortheU.S.economy manyeconomistsestimatethepotentialgrowth
overthenextyearorso,Idowanttosayafew rateatbetween3and3.5percent.Frommid-2003
tothebeginningof2006,theU.S.economy’s
wordsaboutsomeoftheeconomicimplications
actualrealGDPgrowthwasabovethegrowthof
oflong-rundemographicchange.
potential.Overthisperiod,theeconomy’sgrowth
Beforeproceeding,Iwanttoemphasizethat
couldexceedlong-runpotentialbecausethe
theviewsIexpressherearemineanddonot
economywasrecoveringfromthe2001recession.
necessarilyreflectofficialpositionsoftheFederal
Giventhattheeconomy’sactualgrowthcannot
ReserveSystem.Ithankmycolleaguesatthe
permanentlyexceeditspotentialgrowth,itwas
FederalReserveBankofSt.Louisfortheircom-
inevitablethatsomeslowingwastooccur.And,
ments,especiallyKevinL.Kliesen,associate indeed,duringthesecondandthirdquartersof
economistintheResearchDivision,whopro- 2006realGDPgrowthaveragedabout21/4percent,
videdspecialassistance.However,Iretainfull considerablylessthantheroughly33/4percent
responsibilityforerrors. growthexperiencedfromthesecondquarterof
1
ECONOMICOUTLOOK
2003tothefirstquarterof2006.Asthegrowing inrealresidentialfixedinvestmenttypically
economyabsorbedunderutilizedlaborandcapi- occur.Forexample,realresidentialfixedinvest-
talresources,theFedgraduallyraiseditstarget mentdeclinedbyabout40and45percent,respec-
forthefederalfundsratefrom1percentin2004 tively,intheperiodssurroundingthe1973-75
to51/4percentinJuneoflastyear.Thefedfunds and1980-82recessions.1Bycontrast,realresi-
targetrateremainstodayat51/4percent. dentialfixedinvestmenthasdeclinedbyabout
Monetarypolicyactionskeptinflationlargely, 13percentsinceitspeakinthethirdquarterof
thoughnotperfectly,incheckandlikelyhad 2005.
somethingtodowiththetimingofslowerGDP Letmenowturntocurrenteconomicdevel-
growth.IemphasizetimingbecauseslowerGDP opmentsinmoredetail,whichwillsetthestage
growthwasinevitableasthemarginofunderuti- fortheoutlookportionofmytalk.AsIstepback
lizedresourcesfell.Asissooftenthecase,cer- andsurveytheeconomiclandscape,Iseean
taincharacteristicsoftheeconomicslowdown economythatappearstobetransitioningquite
hadlittleornothingtodowithmonetarypolicy. nicelyfromlastyear’sslowpatch,tomoresus-
Twootherdevelopmentswereimportantdeter- tainablegrowth.
minantsofthenatureoftheeconomylastyear.
Onewasthesharprun-upinenergyprices,which
begantobereversedinthemiddleof2006.The
CURRENT DEVELOPMENTS
otherwassubstantialweaknessinhousingmar-
Duringthepastweekorsowehaveseena
kets,whichmayjustnowbeshowingverytenta-
dizzyingarray—thoughtypical,Imightadd—of
tivesignsofreachingbottom.
economicreports.Asusual,someweregoodand
Threeremarkablefactsdeserveattention.
somewereso-so.Asusual,weneedtobeaware
First,realGDPgrowth,thoughsluggishin2002,
thatfirstreleasesofdataareoftenrevised.
hasbeenrobustsince2003,andtheunemploy-
mentrateisnowdownto4.6percent.Second, Onbalance,thereseemstobeafirmertone
long-terminflationexpectationshavehardly tothelatestdata.Particularlynoteworthywas
budged.Third,thequarterlyaverageyieldon thelarger-than-expectedincreaseinrealGDP
10-yearnominalTreasurysecuritiesisactually duringthefourthquarterof2006.Followingrel-
slightlylowertodaythanitwasinmid2002. ativelyanemicratesofgrowthinthesecondand
Theeconomyhasperformedwelldespiteanear thirdquartersof2006,growthofrealGDPduring
triplingofcrudeoilpricessinceDecember2001. thefourthquarterpickedupnicely,risingtoa
Inyearspast,anenergypriceshockofthismag- 3.5percentannualrate.
nitudewastypicallyassociatedwithasubstantial Keepinmind,though,thatthisestimateis
increaseininflationandasharprecession. thefirstforthefourthquarterandsubjecttorevi-
Twothingsaredifferentaboutenergyprice sion.MeasuringGDPgrowthoverthefourquar-
increasesthistime.Oneisthattheincreaseswere tersoftheyear,realGDPincreasedbymorethan
primarilyaconsequenceofaboomingworld 3percentforthefourthstraightyear.Acloser
economy,whichraisedenergydemandrather lookattheGDPreportrevealsthattwoareasof
thanasupplyshock.Second,monetarypolicies strengthwererealconsumeroutlaysandforeign
hereandinmostothercountrieshavedonea purchasesofU.S.goodsandservices.Tosome
finejobofanchoringinflationexpectations. extent,theformerreflectsthedeclineinenergy
Thecurrenthousingslowdown,whichis pricesthatbeganinthemiddleoflastyear,which
muchinthenews,isunusualinthatithasnot hasrestoredsomeofthepurchasingpowerthat
occurredagainstthebackdropofaneconomy- waslostwhengasolinepricesrosewellabove$3
widerecession,whenespeciallylargedeclines pergalloninmanypartsofthecountry.Thelatter
1 Thesetwoperiodsare1973:Q1to1975:Q1and1978:Q3to1982:Q3.Thelatterperiodencompassesthe1980and1981-82recessions.
2
StateoftheU.S.Economy
probablyreflectstheimprovinggrowthprospects Followingarecord-settingrateof1.7million
fortherestoftheworld.Anotherstrikingaspect unitsstartedin2005,single-familystartsfellto
ofthereportwasthe4.2percentgrowthinreal 1.5millionunitsin2006.Thisaverage,though,
finalsales.Hence,despiteamodestdownturn reflectedarelativelylargenumberofstartsduring
ininventoryinvestment,whichnevertheless thefirsthalfoftheyearandthenamuchlower
remainedpositive,realGDPgrowthwasquite levelofstartsduringthesecondhalfof2006.By
strong. December2006,single-familystartswereroughly
TwootheraspectsoftheGDPreportwere 16.5percentbelowtheirannualaverage.
lessfavorablethantheoverallreport.First,busi- In2006,newhomesalesfellabout171/4per-
nessfixedinvestmentpostedaslightdeclinein centtoalittlemorethan1millionunitsand
thefourthquarter.Isuspectthatthedeclinewas builderssoonfoundthemselvesfacinganaccu-
nothingmorethannormalvariation,perhapsa mulationofunsoldhomes.Asaresult,invento-
riesofnewhomesrosesharplyrelativetosales,
consequenceinpartoffirmswaitingforrelease
andinJuly2006theinventory-salesratioreached
ofthenewVistaoperatingsystemfromMicrosoft.
itshighestlevelinmorethan10years.
Overthefourquartersof2006,nonresidential
Inresponse,buildersnaturallybeganto
fixedinvestmentroseby6.8percent,ahealthy
reducenewconstruction.Partofthispullback
andexpectedincreasegiventhattheeconomy
wasmotivatedbyskittishhouseholds;cancella-
hascontinuedtoabsorbexcesscapacity.Atthis
tionrates,accordingtosomelargebuilders,
point,forecastsstillpointtoahealthypaceof
reached40percentormoreduringthelatterpart
growthinbusinesscapitaloutlaysthisyear—
of2006.Althoughthemajorityofforecasters
andperhapsthebetter-than-expectedincreasein
correctlyanticipatedsoftnessinhousingcon-
Decemberfactoryordersisareflectionofthis
struction,themagnitudeofthedeclineexceeded
expectedgrowth.Nonetheless,extensionofthe
theirexpectations.InDecember2005,thecon-
fourthquarterweaknessinbusinesscapitalout-
sensusoftheBlueChipforecasterswasthatreal
laysgoingforwardcertainlywouldbeacause
residentialfixedinvestmentwoulddeclineby
forconcern.
onlyabout1.4percentin2006,usingannual
ThesecondaspectoftheGDPreportthatgar-
averagedata.Instead,thedeclinewasabout41/4
neredalotofattentionwasthenearly20percent
percent,butwasconsiderablysteeper—morethan
rateofdeclineinresidentialfixedinvestment.
12.5percent—measuredfromthefourthquarter
Thedeclinebeganinthesecondquarterandthe
of2005tothefourthquarterof2006.
paceofdeclinepickedupineachsubsequent
Bysomeindicators,thehousingmarketis
quarter.Naturally,thesharpdeclineinprivate
beginningtoshowsignsofstabilizing.Newsingle-
housingstartsandsalesimpartedasignificant
familyhomesalesroseinDecember,thefourth
dragonrealGDPgrowthlastyear.Duringthe
increaseinthepastfivemonths,whileinJanuary
secondhalfof2006,thecontributiontorealGDP
theNationalAssociationofHomeBuilders’hous-
growthfromrealresidentialfixedinvestment
ingmarketindex—ameasureofbuilderconfi-
averagedabout–11/4percentagepoints.
dence—rosetoitshighestlevelsinceJuly2006.
Lastyearwasadifficultenvironmentfor Further,thefour-weekmovingaverageofthe
homebuilders.Itwasalsodifficultforsome MortgageBankersAssociationindexofapplica-
homeownersinthosepartsofthecountrywhere tionsforhomepurchaseshasincreasednicely
thepaceofhomepriceappreciationslowedtoa sinceitstroughlastOctober.Finally,theUniversity
standstill.I’llfocusonnewsingle-familyhomes, ofMichigan’sconsumersurveyofhome-buying
sincethatisthedominantpartofthenew-home conditionsinJanuary2007reportedlyrosetoits
market;thenumberofmulti-familyunitsstarted highestlevelsincemid-2005.
hasremainedrelativelyconstantsince1997,at Themarketforpreviouslysoldsingle-family
about340,000unitsperyear. homesmayalsohavestabilized.Existinghome
3
ECONOMICOUTLOOK
salesroseamodest0.1percentinthefourth thisproblem,butonlycoverhomesfinancedby
quarterof2006,afterdeclining6.4percentinthe conformingmortgages,whicharecurrentlycapped
thirdquarter.Moreover,thependinghomesales at$417,000.Althoughachangingmixofhomes
indexreportedbytheNationalAssociationof soldisnotaproblemwiththisseries,high-end
RealtorsturnedupinJanuary,registeringitslargest homesareexcludedaltogether.TheOFHEOhome
monthlyincreasesinceMarch2004.Although priceseriesderivedfrommortgagedatafornewly
theinventoryofexistinghomesforsale,relative purchasedhomesshowsanannualrateofprice
tosales,hasalsodroppedoverthepastfew changeofonlyabout1.5percentinthethird
months,itsDecemberlevelof6.5wasstillabit quarterof2006,thelatestdataavailableasof
abovethatfornewhomes,whichstoodat5.9. thistime.
Whilerecentdataseemtopointinafavorable ToavoidthestatisticallimitationsoftheNAR
direction,wemustrecognizethatthehousingmar- andOFHEOpricedata,wecanturntotheCase-
ketisnotoutofthewoodsyet.Themostpressing Shillerpriceseriesfor20cities,availablethrough
issueforbuildersremainsthebacklogofunsold November2006.The20-citycompositeseries
homes,atwhichtheyarechippingaway,andthe showsdeclinesforbothOctoberandNovember;
continuedhighratesofcanceledorders. inNovember,theserieswasonly1.7percentabove
Aspecialwordofcautionisinordercon- itsprioryearlevel.Moreover,theNovember
cerninghousingdata.Startsandpermitsdataare
declinefromOctoberoccurredin17ofthe20
routinelyaffectedbyweathervariations,espe-
cities.
ciallyinthewinter.Toanunusualdegree,sales
Mysummaryconclusiononhomepricesis
dataareaffectedbycancellations,whichoccur
thatwehaveevidenceofpervasiveweakness
whenbuyerswalkawayfromsalescontracts.In
lastyear.Itremainstobeseenwhatthisyearwill
publisheddata,cancelledsalesarenotsubtracted
bring,butataminimumwecansaythatwedo
fromnewsalestocreateanetsalesseries.More-
nothaveevidenceasyetthathomepriceshave
over,cancelledsalesarenotputbackintothe
stabilized.
dataontheinventoryofunsoldnewhomes.
Forforecastersandpolicymakers,akey
Anecdotalreportsclearlyindicatethatcancella-
unknownisthelong-runsustainablelevelof
tionshavebeenmaterial.Thus,officialdataover-
housingstartsgoingforward.Iftherecentrateof
statenetsalesofnewhomesandunderstatethe
startshasbeenabovethissustainablerate,then
inventoryofunsoldhomes.Finally,favorable
wewouldexpecttoseeanextendedperiodof
recentnewsontheinventoryofexistinghomes
slower-than-normalactivityuntiltheinventory
forsalemaywellhavebeeninfluencedbydis-
bulgeisworkedoff.Bythesametoken,ifstarts
couragedhomeownerstakingtheirpropertiesoff
havefallentoalevelthatisbelowtheirsustain-
themarketratherthanbyactualsales.
ablerate,thenwecanexpectthattheinventory
Housepricedataarealsosubjecttodistor-
bulgewillbeworkedoffthisyear,sothatthe
tions.Forexistinghomes,themediansalesprice
datareleasedbytheNationalAssociationof levelstartswillreturntotheirnormalratesome-
Realtors(NAR)showadeclinestartinginAugust timelaterthisyear.
andcontinuingeverymonthexceptforasolid Statistically,thereareseveralwaystoestimate
recoveryinDecember.However,medianprice thenormallevelofstarts.Acommonmethodis
datacanbedistortedbyachangingmixofsales. toestimateamodelofsomesort.Forourpur-
Fewersalesofhigh-endhomeswillreducethe poses,assumethatsingle-familyhousingstarts
median.DatareleasedbytheOfficeofHousing inanyyearisafunctionofthreeprimaryvari-
EnterpriseOversight(OFHEO)arenotsubjectto ables:interestrates,householdincomeanddemo-
2 Themodelspecifiesthelog-levelofsingle-familystartsasafunctionofthelevelofthe10-yearTreasuryyield,thelog-levelofhouseholds
andthelog-levelofrealGDP.ThemodelisanARMAspecificationofAR(1)andMA(2).Themodelusesannualdata,1965to2006.Further
detailsareavailableonrequest.
4
StateoftheU.S.Economy
graphics.2In2006,amodelofthissortprojected Datarevisionsareoneofthenumerous
thathousingstartswouldtotalabout1.7million sourcesofuncertaintiesthatfacemonetarypoli-
units,about12.5percentmorethantheactual cymakers.Thereasonisthatourcurrentpolicies
levelofabout1.5millionunits.Assume:1)no arealwayscalibratedtothedatathatpresent
changeintheaveragelevelofinterestratesthis themselvestoustoday—inreal-time—andhow
year(relativeto2006);2)thatrealGDPincreases thedatamapintothenear-termoutlookforeco-
by3percentthisyear;and3)thatthenumberof nomicactivityandinflation.Thereisalwaysthe
householdsincreasesby1percent.Withthese riskthatourcurrentpolicycaninadvertentlybe
assumptions,themodelpredictsthatsingle- eitherbetoorestrictiveortoostimulative.That’s
partofthechallengeofmakingmonetarypolicy.
familyhousingstartswilltotalabout1.4million
AsIthinkyoucanseefrommyearlierremarks,
unitsthisyear,whichwecancomparetothe
wedigdeeplyintothedataandourinferences
actual1.5millionunitsin2006.Thisprojection
fromwhatweobservearenotalwaysinaccord
for2007,whichwouldbea2.5percentdecline
withasurfacereadingofthedata.
from2006’saverage,appearstobeatthehigh-end
ofmostforecasters’expectation,perhapsbecause
themodeljustoutlinedmakesnoallowancefor
RECENT INFLATION
theoverhangofexcessiveinventoryatthebegin-
ningofthisyear.But,eventually,astheinventory DEVELOPMENTS
isworkedoff,home-buildingactivityshouldpick
I’llnowdiscussrecentdevelopmentsonthe
upsubstantiallyfromthe2006year-endlevelof
inflationfront.Lastyear’sCPIinflationnewswas
about1.2millionunitsatanannualrate.
somewhatpeculiarinthat,overthe12months
Someeconomistshaveworriedthatapoten-
endingDecember2006,inflationmeasuredby
tialsideeffectfromthehousingrecessionwould
theall-itemsCPI—sometimescalled“headline
betodragdownconsumerspendingmoregener-
inflation”—declinedbutcoreinflation,which
allyashomepricesleveledoff.Yet,asthefourth-
excludesfoodandenergyprices,roseslightly.
quarterGDPreportrevealed,realconsumer
HeadlineCPIinflationslowedfrom3.4percent
outlaysappeartobeholdingupwell.
in2005to2.6percentin2006,whiletheinfla-
Thestrengthofconsumeroutlaysissurely
tionratemeasuredbythePCEpriceindexrose
duetoasustainedhealthylabormarketoutlook, slowedfrom2.9percentto2.3percentoverthe
whichwecanexpecttohelpkeepconsumer sameperiod.
spendingonasolidfootingthisyear.Although Themoderationofheadlineinflationis
lastweek’semploymentreportshowedthatjob undoubtedlyareflectionofthesharpdeclinein
gainsinJanuarywereabitbelowexpectations, energypricesoverthesecondhalfof2006.Most
jobgainsoverthepreviousmonthswererevised economistsbelievethatcoreinflationisabetter
substantiallyhigherasaresultoftheannual measureofinflationpressures.ThecorePCEprice
benchmarkrevisiontotheestablishmentsurvey indexroseslightlyfrom2.1percentin2005to
bytheBureauofLaborStatistics(BLS).Accord- 2.2percentin2006andthecoreCPIindexrose
ingtotheBLS,nonagriculturalpayrollemploy- evenmore,from2.2to2.6percent.3Fortunately,
mentinthebenchmarkmonth—March2006—was corepricepressureshaveeasedoflate:Thethree-
revisedupby752,000,anunusuallylargerevision. monthrateofchangeinthecorePCEwas1.7
AveragemonthlyjobgainsfromMarch2006to percent,whilethesix-monthrateofchangewas
December2006werealsoboosted,fromtheir 1.9percent.Clearly,themomentumseemstobe
originalestimateof148,000permonthto174,000 headedinafavorabledirection,aslastweek’s
permonth. FOMCpressreleasenoted.
3 Inflationismeasuredasthepercentchange,DecembertoDecember.
5
ECONOMICOUTLOOK
Butbeforewedeclarevictoryandheadhome, relevanttojudgingtheinflationoutlook,suggest
it’swisetoconsidersomeoftheupsiderisksthat thattheinflationrateislikelytofallintoareason-
Iworryabout.Oneoftheserisks,asI’venoted ablerangethisyear.If,however,coreinflation
earlier,isthepossibilitythatwemightbeunder- seemstobesettlingatarateabove2percent,then
estimatingthelikelypaceofeconomicactivity. suchanoutcomewouldbeunacceptabletome.I
IfwegetanupsidesurpriseonGDPgrowth,then
putaveryhighweightontheFed’sresponsibility
monetarypolicymayhavetobetightenedsome-
tomaintainlowandstableinflation.
what.
Atsomepointwe’llalmostcertainlyseesome
Anotherriskisthatlaborproductivitygrowth
surprisesinthedata.Longexperiencewitheco-
mightbelowerthancurrentlyexpected.Data
nomicforecastsindicatesthatweneedtoconsider
releasedjusttwodaysagoindicatethatin2006
asastandardfeatureoftheenvironmentGDP
theannualaverageincreaseinproductivityin
forecasterrorsintheneighborhoodof11/2per-
thenonfarmbusinesssectorwas2.1percent,
centagepointsonafour-quarter-aheadhorizon.
downslightlyfromtheincreaseof2.3percentin
Thus,aforecastof3percentGDPgrowthshould
2005anddownsubstantiallyfromtheaverage
rateof3.2percentfor2000-2004.Giventhatthe
beexpressedas3percentplusorminus11/2per-
cent.Fromexperience,anoutcomeinthisrange
economy’spotentialgrowthdependsontrend
hasaprobabilityofabouttwo-thirds.Theother
growthinproductivityandinthelaborforce,we
one-thirdprobabilityisdividedequallyabove
willhavetowatchtrendsinbothoftheseclosely
andbelowtherange.Thus,theprobabilityofan
intheyearsahead.
outcomesignificantlydifferentfromthebaseline
forecastisnotsmall.TheFOMCispreparedto
THINKING ABOUT THE respondwhentheoutcomepromisestodepart
fromthebaselineinasustainedway.
OUTLOOK
Althoughincomingdatawillatsomepoint
Initspolicystatementissuedafterthemeeting
surpriseus,whatshouldnotbesurprisingisthe
lastweek,theFOMCnotedthattheeconomy
Fed’scommitmenttomaintainingpricestability.
seemslikelytoexpandatamoderatepaceover
Inflationforecastsoverthenextfourquarters
comingquarters.Myowntakeonwhat“moderate
arealsosubjecttostandarderrors.Overalonger
pace”meansisthatrealGDPislikelytoincrease
horizon,though,theinflationissueisnotoneof
byroughly3percentoverthefourquartersof
forecasterrorsbutofpolicycommitmentand
thisyear—particularlyifthehousingmarketis
policyerrors.Mycommitment,certainly,istodo
nearaninflectionpointandnolongerasignifi-
whatIcantopromotepolicyadjustmentsthatwill
cantdragongrowth.ButIwanttoemphasizethat
yieldaninflationoutcome,onaverageovera
fluctuationsingrowtharenormalandthatno
policyactionisnecessarilyindicatedifgrowth
periodofseveralyears,centeredon11/
2
percent
onthecorePCEpriceindex.Suchanoutcome
comesinsomewhataboveorbelowthatoutlook.
willensurethattheFOMCmaintainsitscurrent
Whendatacomeinoutsidetherangeexpected,
highlevelofcredibility.Maintainingpricestabil-
weneedtounderstandthereasonsandthelike-
lihoodthatthedeparturewillbesustainedunless ityiscentraltomaximizingsustainableeconomic
thereisanoffsettingpolicyresponse.Onlythen growthandthehighestpossiblelevelofemploy-
doesitmakesensetoconsiderapolicyresponse. ment.Stableinflationalsocontributesgreatlyto
Regardingtheoutlookforinflation,I’vesaid theeconomy’sabilitytoadjustsuccessfullyto
forquitesometimethatitmighttakeawhilefor inevitableshocks.ThathasbeentheFed’smes-
underlyingpricepressurestorecede.Recent sage—anditsstatedpolicy—formanyyears.It
inflationdatathemselves,andotherinformation hasbeenasuccessfulstrategy.
6
StateoftheU.S.Economy
LONG-RUN CHALLENGES mightrisemodestlyinthecomingyears.Ifthat
happens,laborforcegrowthwillnotslowasrap-
Inanoutlookspeech,Icannotskiptheoppor-
idlyassomeprojectionsindicatebecausemore
tunitytodiscussbrieflytheeconomicimplica-
peopleoverage65willbecontinuingtowork
tionsofthechangingdemographicsituationin
thanpastretirementpatternswouldleadusto
theUnitedStatesandtherestoftheworld.
expect.5Butthedemographicstellusthatsuch
Demandsongovernmentfromouragingpopula-
anoutcomeonlydelaysinevitableadjustment.It
tioncenteron,butarenotconfinedto,financ-
couldbethatmoreofthoseinthe65-69agegroup
ingthiscountry’stwoprimaryprogramsforthe
mightworkthanhasbeenthecaserecently,but
elderly—SocialSecurityandMedicare.Chairman
whenthosesamepersonsbecomethe75-79age
BernankerecentlytestifiedbeforetheU.S.
groupwecanbeprettysurethatmostwillbe
Congressonthismatter.4
retired.Becauselaborrepresentsthelargestsingle
Themacroeconomicimplicationsofdemo-
inputinU.S.production,GDPwilleventually
graphicchangearesignificant.Theretirement
begintoexhibitaslowerrateofgrowthunless
ofthebabyboomersisexpectedtoreducethe thereisanoffsettingincreaseintheeconomy’s
economy’slaborforceparticipationratedramati- structuralrateofproductivitygrowth.6Because
cally.Theparticipationrateisthepercentageof incomeforthecountryasawholedependson
personsage16andoverinthelaborforce,either production,slowergrowthinGDPandincome
workingorseekingwork.Declininggrowthinthe impliesslowergrowthinconsumptionofU.S.
laborforcehasimportantimplicationsforour households.
long-run,sustainablegrowthofGDP. Thelikelyresultisthat,allelseequal,a
InitslatestBudgetandEconomicOutlook, decreaseinlaborsupplygrowthwillleadto
theCongressionalBudgetOfficeestimatesthat slowergrowthinoureconomicwell-being.Since
theaverageannualgrowthofpotentialoutput monetarypolicycanaffectonlypricesandnot
from1950to2006was3.4percent.The3.4per- quantitiesinthelongrun,theFedcannotalter
centisdividedbetweenlaborproductivitygrowth thissituation.
of1.8percentagepointsandlaborforcegrowth Mydiscussionofthemacroeconomicoutlook
of1.6percentagepoints.Overthenext10years, mayseemsomewhatabstract,asisunavoidably
theCBOexpectsthesecontributionstochange thecasewhendiscussingaGDPof$11.422tril-
dramatically.From2007to2017,theCBOprojects lion.ThatisalargernumberthanIcancompre-
thatproductivitywillincreasebyanaverageof2 hend.Slowergrowthinthisnumberisalsohardto
percentperyear;however,owingtothegradual makerealtousasindividuals.Thedemographic
declinesinthelaborforceparticipationrate,the challenge,however,willbefeltbyeveryfirmin
growthofthelaborforceisprojectedtoincrease theeconomy.IknowthatweattheFederal
byanaverageofonly0.7percentperyear.Hence, ReserveBankofSt.Louisareacutelyawareof
theCBOprojectsthegrowthoftheeconomy’s thesignificantnumberofemployeesretiring
potentialoutputwillslowbyabout0.75percent- overthenextdecade.Thoseretiringemployees
agepointsinthecomingdecadetoalittlemore areourlittlepieceofthenation’sdemographic
than2.5percent.Thisprojection,ifaccurate,has challenge.MyconfidenceintheUnitedStates
seriouslong-termimplications. meetingthechallengereflectsmyconfidencein
Inapreviousspeech,Idiscussedthepossibil- thenation’sdecentralizedmarketsystem.Indi-
itythatparticipationratesamongolderworkers vidualfirmswilladjust,bypersuadingsome
4 SeeBernanke(2007).
5 SeePoole(2006).
6 Ofcourse,thisassumesthatimmigrationratesorchangesinfertilityratesdonotmateriallyaltertheprojectedgrowthofpotentiallaborforce.
7
ECONOMICOUTLOOK
employeestoretirelater,bymovingyounger
employeesmorequicklyintopositionsofrespon-
sibilityandbysubstitutingcapitalforlabor.The
challengeforgovernmentswillbemoredifficult,
becausepoliticaldecisionsarenotreachedas
easilyasdecisionsinindividualfirms.Still,if
weapproachthepoliticalissueswithfullunder-
standingofthefundamentalsofthedemographics
andwiththespiritofcompromisethatcharac-
terizesourdemocracy,Iamconfidentthatwe’ll
comeouttheothersideofthedemographictran-
sitioninfineshape.
REFERENCES
Bernanke,BenS.“Long-termFiscalChallenges
FacingtheUnitedStates.”Testimonybeforethe
CommitteeontheBudget,U.S.Senate.January18,
2007.
CongressionalBudgetOffice.“TheBudgetand
EconomicOutlook:FiscalYears2008to2017.”
January2007.
Poole,William.“U.S.LaborInputinComingYears.”
RemarkstotheCharteredFinancialAnalysts
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Cite this document
APA
William Poole (2007, February 8). Speech. Speeches, Federal Reserve. https://whenthefedspeaks.com/doc/speech_20070209_poole
BibTeX
@misc{wtfs_speech_20070209_poole,
author = {William Poole},
title = {Speech},
year = {2007},
month = {Feb},
howpublished = {Speeches, Federal Reserve},
url = {https://whenthefedspeaks.com/doc/speech_20070209_poole},
note = {Retrieved via When the Fed Speaks corpus}
}