september 11 and the unemployment rate rose sharply. however, layoffs diminished noticeably in january, and employment turned up last month. moreover, initial claims for unemployment insurance have decreased markedly, on balance, providing further evidence of an improvement in labor market conditions. the dynamics of inventory investment and the balance of factors influencing consumer demand will have important consequences for the economic outlook in coming months. but the broad contours of the present cycle have been, and will continue to be, driven by the evolution of corporate profits and capital investment. the retrenchment in capital spending over the past year and a half was central to the sharp slowing we experienced in overall activity. on balance, the recovery in spending on business fixed investment is likely to be only gradual ; in particular, its growth will doubtless be less frenetic than in 1999 and early 2000 - - a period during which outlays were boosted by the dislocations of y2k and the extraordinarily low cost of equity capital available to many firms. nonetheless, if the recent morefavorable economic developments gather momentum, uncertainties will diminish, risk premiums will fall, and the pace of capital investment embodying new technologies will increase. even a subdued recovery would constitute a truly remarkable performance for the american economy in the face of so severe a decline in equity asset values and an unprecedented blow from terrorists to the foundations of our market systems. for if the tentative indications that the contraction phase of this business cycle has drawn to a close are ultimately confirmed, we will have experienced a significantly milder downturn than the long history of business cycles would have led us to expect. although there are ample reasons to be cautious about the economic outlook, the recuperative powers of the u. s. economy in the recent past have been encouraging. one important ingredient in that resilience has been the performance of productivity. even discounting somewhat the phenomenal strength of the growth of output per hour of late, one cannot help but be impressed with how well productivity has held up in the face of the abrupt slowing of the economy in late 2000 and in 2001. that performance has been encouraging because the nation ’ s fortunes, to a very great degree, will depend on the evolution of the growth of productivity. in particular, productivity will play a central role in determining the nature of the economy ’ s response to the aging of the population soon upon us. most economic forecasts are subject to significant uncertainty. at least by

that weren't available in czechoslovakia then. and here i was doing all my shopping there! this is just a fragment from daily life, but to me it illustrates two things that are typical of our relationship to the coming new members of the eu. one thing is how quickly these countries have changed, how rapidly they are integrating with and moving closer to western europe. the other is how difficult most of us in western europe find it to understand how rapidly things are moving and how much has already occurred in these countries. the image of a west european with shopping bags full of aid to the poor neighbours in the east still remains, while we are incapable of seeing how much we can pick up from the new member countries. how poor are the candidate countries? i should like to begin with a critical examination of the picture we normally give of the applicant countries. two common illustrations of the economic side of the eu enlargement eastwards are graphs showing the development of production since the fall of communism and a table of the income differences between east and west. if we look at the statistics summed up in the european commission's reports, gdp per capita adjusted for purchasing power ( ppp ), the gap certainly looks huge. the riches of the 10 central and east european candidate countries, slovenia, with 72 per cent of the eu average, and the czech republic, with 60 per cent of the eu average, are around as poor as countries like greece, portugal and spain were before they joined the eu. however, the poorest countries in the applicant group, bulgaria and rumania, have only approximately 25 per cent of the eu average. the graphs for production levels since 1990 look equally gloomy, only at the end of the 1990s do they reach the same level as at the fall of the berlin wall. the conclusion is, according to these figures, that the candidate countries will not catch up to the eu countries for a long while yet. these figures reflect partly real poverty, particularly in regions beyond the cities and regions that already have an intensive exchange with the eu. however, a considerable part of the statistical comparison is misleading. this is partly because the statistics were often rigged under the dictatorship, which makes it difficult to reconstruct proper data, and partly because production in 1989, at the end of the communist regime, contained a large percentage of heavy military equipment as well as inferior machinery and consumer goods that never came anywhere near marketing or market valuation. much of this would probably be impossible to sell in