Loan standards tightened in 2000, and credit markets discriminated sharply between investment grade and other credits, for the most part a desirable and prudent response to heightened uncertainty about current and future loan quality. Unlike the late 1980s as well, large government budget deficits are not crowding out private investment, or creating the need for fiscal austerity. On the contrary, government budgets at both the national and local level remain supportive. Finally, of course, the economy now has 100 basis points of easing in the pipeline. This may help shore up confidence, creating some rebound in spending by both firms and consumers.
Recent signs are at least somewhat encouraging here.
In these circumstances, it goes without saying vigilance on the part of the Federal Reserve is necessary. Thus, in my view, the economy is likely to continue feeling the effects this quarter of a significant but relatively short-lived inventory correction. The correction is the result of an unexpectedly rapid adjustment toward more sustainable growth in demand. There are risks for sure, the level of private savings and the softness in domestic demand in many foreign economies, to name two. Nonetheless, I expect activity to increase later in the year, and growth for the year to average around 2 percent.