21 April 2004, 18:07 Fed's Geenspan speech to Congress
Following is the full text
of Federal Reserve Chairman Alan Greenspan's testimony on the
U.S. economy before Congress' Joint Economic Committee on
Wednesday:
"Mr. Chairman and members of the committee, I am pleased to be
here today to offer my views on the outlook for the U.S.
economy.
The economy appears to have emerged around the middle of last
year from an extended stretch of subpar growth and entered a
period of more vigorous expansion. After having risen at an
annual rate of 2-1/2 percent in the first half of last year,
real GDP increased at an annual pace of more than 6 percent in
the second half. Aided by tax cuts, low interest rates, and
rising wealth, household spending continued to post sizable
gains last year. In addition, an upturn in business investment,
which followed several years of lackluster performance, and a
sharp rise in exports contributed importantly to the
acceleration in real GDP over 2003.
Although real GDP is not likely to continue advancing at the
same pace as in the second half of 2003, recent data indicate
that growth of activity has remained robust thus far this year.
Household spending has continued to move up, and residential
home sales and construction remain at elevated levels. In
addition, the improvement in business activity has become more
widespread. In the industrial sector, nearly two-thirds of the
industries that make up the index of industrial production have
experienced an increase in output over the past three months.
More broadly, indicators of business investment point to
increases in spending for many types of capital equipment. And
importantly, the latest employment figures suggest that
businesses are becoming more willing to add to their
workforces, with the result that the labor market now appears
to be gradually improving after a protracted period of
weakness.
Looking forward, the prospects for sustaining solid economic
growth in the period ahead are good. Monetary policy remains
quite accommodative, with short-term real interest rates still
close to zero. In addition, fiscal policy will likely continue
to provide considerable impetus to domestic spending through
the end of this year.
Importantly, the caution among business executives that had
previously led them to limit their capital expenditures appears
to be giving way to a growing confidence in the durability of
the expansion. That confidence has, no doubt, been bolstered by
favorable borrowing conditions, ongoing improvements in
efficiency, and rising profitability, which have put many firms
on a more solid financial footing.
Nevertheless, some of the strains that accompanied the
difficult business environment of the past several years
apparently still linger. Although businesses are replacing
obsolescent equipment at an accelerated pace, many managers
continue to exhibit an unusual reluctance to anticipate and
prepare for future orders by adding to their capital stock.
Despite a dramatic increase in cash flow, business fixed and
inventory investment, taken together, have risen only
moderately. Indeed, internal corporate funds exceeded
investment over the course of last year for the first time
since 1975.
Similar cautious behavior has also been evident in the hiring
decisions of U.S. firms, during the past several years. Rather
than seeking profit opportunities in expanding markets,
business managers hunkered down and focused on repairing
severely depleted profitability predominately by cutting costs
and restricting their hiring. Firms succeeded in that endeavor
largely by taking advantage of the untapped potential for
increased efficiencies that had built up during the rapid
capital accumulation of the latter part of the 1990s. That
process has not yet played out completely. Many firms seem to
be continuing to find new ways to exploit the technological
opportunities embodied in the substantial investments in
high-tech equipment that they had made over the past decade.
When aggregate demand accelerated in the second half of 2003,
the pace of job cuts slowed. But because of the newfound
improvements in the efficiency of their operations, firms were
able to meet increasing demand without adding many new workers.
As the opportunities to enhance efficiency from the capital
investments of the late 1990s inevitably become scarcer,
productivity growth will doubtless slow from its recent
phenomenal pace. And, if demand continues to firm, companies
will ultimately find that they have no choice but to increase
their workforces if they are to address growing backlogs of
orders. In such an environment, the pace of hiring should pick
up on a more sustained basis, bringing with it larger
persistent increases in net employment than those prevailing
until recently.
Still, the anxiety that many in our workforce feel will not
subside quickly. In March of this year, about 85,000 jobless
individuals per week exhausted their unemployment insurance
benefits--more than double the 35,000 per week in September
2000. Moreover, the average duration of unemployment increased
from twelve weeks in September 2000 to twenty weeks in March of
this year. These developments have led to a notable rise in
insecurity among workers.
Most of the recent increases in productivity have been
reflected in a sharp rise in the pretax profits of nonfinancial
corporations from a very low 7 percent share of that sector's
gross value added in the third quarter of 2001 to a high 12
percent share in the fourth quarter of last year. The increase
in real hourly compensation was quite modest over that period.
The consequence was a marked fall in the ratio of employee
compensation to gross nonfinancial corporate income to a very
low level by the standards of the past three decades.
If history is any guide, competitive pressures, at some point,
will shift in favor of real hourly compensation at the expense
of corporate profits. That shift, coupled with further gains in
employment, should cause labor's share of income to begin to
rise toward historical norms.
Such a process need not add to inflation pressures. Although
labor costs, which compose nearly two-thirds of consolidated
costs, no longer seem to be falling at the pace that prevailed
in the second half of last year, those costs have yet to post a
decisive upturn. And even if they do, the current high level of
profit margins suggests that firms may come under competitive
pressure to absorb some acceleration of labor costs. Should
such an acceleration of costs persist, however, higher price
inflation would inevitably follow.
The pace of economic expansion here and abroad is evidently
contributing to some price pressures at earlier stages of the
production process and in energy markets, and the decline in
the dollar's exchange rate has fostered a modest firming of
core import prices. More broadly, however, although the recent
data suggest that the worrisome trend of disinflation
presumably has come to an end, still-significant productivity
growth and a sizable margin of underutilized resources, to
date, have checked any sustained acceleration of the general
price level and should continue to do so for a time. Moreover,
the initial effect of a slowing of productivity growth is more
likely to be an easing of profit margins than an acceleration
of prices.
As I have noted previously, the federal funds rate must rise at
some point to prevent pressures on price inflation from
eventually emerging. As yet, the protracted period of monetary
accommodation has not fostered an environment in which
broad-based inflation pressures appear to be building. But the
Federal Reserve recognizes that sustained prosperity requires
the maintenance of price stability and will act, as necessary,
to ensure that outcome."////
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