The Longer Run Outlook Let me turn now to the longer run outlook for the economy over the next several years. The key question is whether we can return to the strong, noninflationary growth path of recent years. I am very optimistic that we can if we continue to have strong productivity growth and if we pursue appropriate fiscal and monetary policies. Productivity Is Key Productivity is critically important. With productivity increases, businesses can produce more output with given labor and capital inputs or, equivalently, the same output can be produced with fewer inputs or at lower cost.
Productivity is the key to noninflationary growth.
When economic growth is entirely demand-driven, inflationary pressures tend to rise as capacity is more fully utilized and supply limits are reached. When demand growth is accompanied by productivity gains, however, additional capacity is added and inflationary pressures are mitigated. Over the past several years, we have seen very rapid demand growth spurred by consumer spending. We have not experienced serious inflationary pressures, however, because we have also seen very strong productivity growth. Indeed, over the past five years, growth of nonfarm business productivity has averaged 2.6 percent.