a long - awaited pickup in the growth of labor productivity began to show through more strongly in the data ; and this accelerated increase in output per hour has enabled firms to raise workers ’ real wages while holding the line on price increases. gains in productivity usually vary with the strength of the economy, and the favorable results that we have observed during the past two years or so, when the economy has been growing more rapidly, almost certainly overstate the degree of structural improvement. but evidence continues to mount that the trend of productivity has accelerated, even if the extent of that pickup is as yet unclear. signs of major technological improvements are all around us, and the benefits are evident not only in high - tech industries but also in production processes that have long been part of our industrial economy. those technological innovations and the rapidly declining cost of capital equipment that embodies them in turn seem to be a major factor behind the recent enlarged gains in productivity. evidently, plant managers who were involved in planning capital investments anticipated that a significant increase in the real rates of return on facilities could be achieved by exploiting emerging new technologies. if that had been a mistake on their part, one would have expected capital investment to run up briefly and then start down again when the lower - than - anticipated rates of return developed. but we - 5have instead seen sustained gains in investment, indicating that hoped - for rates of return apparently have been realized. notwithstanding a reasonably optimistic interpretation of the recent productivity numbers, it would not be prudent to assume that even strongly rising productivity, by itself, can ensure a non - inflationary future. certainly wage increases, per se, are not inflationary, unless they exceed productivity growth, thereby creating pressure for inflationary price increases that can eventually undermine economic growth and employment. because the level of productivity is tied to an important degree to the stock of capital, which turns over only gradually, increases in the trend growth of productivity probably also occur rather gradually. by contrast, the potential for abrupt acceleration of nominal hourly compensation is surely greater. as i have noted in previous appearances before congress, economic growth at rates experienced on average over the past several years would eventually run into constraints as the reservoir of unemployed people available to work is drawn down. the annual increase in the working - age population ( from 16 to 64 years of age ), including immigrants, has been approximately 1 percent a year in recent years. yet employment, measured by the count of persons who are working rather than by the count of

in assessing the extent of the problems in east asia. in the event, the contraction of output and incomes in a number of asian economies has turned out to be more substantial than most had anticipated. moreover, financial markets in asia and in emerging market economies generally have remained unsettled, portending further difficult adjustments. the contraction in asian economies, along with the rise in the foreign exchange value of the dollar over 1997, prompted a sharp deterioration in the us balance of trade in the first quarter. nonetheless, the american economy proved to be unexpectedly robust in that period. the growth of real gdp not only failed to slow, it climbed further, to about a 5½ percent annual rate in the first quarter, according to the current national income accounts. domestic private demand for goods and services - including personal consumption expenditures, business investment, and residential expenditures - was exceptionally strong. evidently, optimism about jobs, incomes, and profits, high and rising wealth - to - income ratios, low financing costs, and falling prices for high - tech goods fed the appetites of households and businesses for consumer durables and capital equipment. in addition, inventory investment contributed significantly to growth in the first quarter ; indeed, the growth of stocks of materials and goods outpaced that of overall output by a wide margin during the first quarter, adding 1 percentage points to the annualized growth rate of gdp. although accumulation of some products likely was unintended, surveys - 2indicate that much of the stockbuilding probably reflected firms ’ confidence in the prospects for continued growth. as evidence piled up that the economy continued to run hot during the winter, the federal reserve ’ s concerns about inflationary pressures mounted. domestic demand clearly had more underlying momentum than we had anticipated, supported in part by financial conditions that were quite accommodative. credit remained extremely easy for most borrowers to obtain ; intermediate - and long - term interest rates were at relatively low levels ; equity prices soared higher, despite some disappointing earnings reports ; and growth in the monetary aggregates was rapid. indeed, the crises in asia, by lowering longer - term us interest rates - through stronger preferences for dollar investments and expectations of slower growth ahead - and by reducing commodity prices, probably added to the positive forces boosting domestic spending in the first half, especially in the interest - sensitive housing sector. the robust expansion of demand tightened labor markets further, giving additional impetus to the upward trend in labor costs. inflation was low - though, given the lags with