to pay off their debts. a persistent, very low inflation environment also tends to result in chronically low short - term interest rates. this type of situation would leave less scope for the fomc to respond with its conventional monetary policy tool - namely, a cut in the federal funds rate - to counteract a weakening in the economy. the outlook for the economy let me turn now to where i think the economy is headed over the next several years. the latest estimates show that both real gdp and industrial production actually edged down in the first quarter of this year. some of this weakness appears to be the result of factors that i expect will be only transitory, such as the unusually harsh winter weather in some regions of the country and the west coast port labor dispute that briefly restrained international trade and caused disruptions in manufacturing supply chains. also, statistical noise or measurement issues may have played some role. this is not the first time in recent years that real gdp has been reported to decline, or grow unusually slowly, in the first quarter of the year. there is a healthy debate among economists - many within the federal reserve system - about some of the technical factors that may lie behind this pattern. 4 nevertheless, see charles e. gilbert, norman j. morin, andrew d. paciorek, and claudia r. sahm ( 2015 ), “ residual seasonality in gdp, ” feds notes ( washington : board of governors of the federal reserve system, may14 ) ; glenn d. rudebusch, daniel wilson, and tim mahedy ( 2015 ), “ the puzzle of weak first - quarter gdp growth ( pdf ), ” frbsf economic letter 2015 – 16 ( san francisco : federal reserve bank of san francisco, may ) ; tom stark ( 2015 ), “ first quarters in the national income and product accounts ( pdf ), ” research rap - special report ( philadelphia : federal reserve bank of philadelphia, may ) ; and jan groen and bis central bankers ’ speeches at least a couple of other more persistent factors also likely weighed on economic output and industrial production in the first quarter. in particular, the higher foreign exchange value of the dollar that i mentioned, as well as weak growth in some foreign economies, has restrained the demand for u. s. exports. moreover, lower crude oil prices have significantly depressed business investment in the domestic energy sector. indeed, industrial production continued to decline somewhat in april and may. we expect the drag on domestic economic activity

, the recovery in economic activity from a shallow decline appears less vigorous than in the past. the lowest sustained rates of inflation in forty years imply that nominal growth in sales and profits looks particularly anemic. in contrast, in the 1950s and early 1960s, the last period of stable prices, populations and employment were growing considerably faster than the recent pace so that growth in nominal gdp, consolidated corporate sales, and profits was seen as still quite respectable. reflecting concerns about the strength of the recovery, managers continue to limit capital spending to only the most pressing needs. given the key role of perceptions of subdued profitability in the current period, it is ironic that the practice of not expensing stock - option grants, which contributed to the surge in earnings reported to shareholders from 1997 to 2000, has imparted a deceptive weakness to the growth of earnings reported to shareholders in recent quarters. as stock market gains turned to losses a couple of years ago, the willingness of employees to accept stock options in lieu of cash or other forms of compensation apparently diminished. according to estimates by federal reserve staff, the value of stock option grants for the s & p 500 corporations fell about 15 percent from 2000 to 2001, and grant values have likely declined still further this year. moreover, options grants are presumably being replaced over time by cash or other forms of compensation, which are expensed, contributing further to less robust growth in earnings reported to shareholders from its trough last year. in contrast, the measure of profits calculated by the department of commerce for the national income and product accounts is designed to gauge the economic profitability of current operations. it excludes a number of one - time charges that appear in shareholder reports, and, importantly, records options as an expense, albeit at the time of exercise. although this treatment of the cost of options is not ideal, it is arguably superior to their treatment in shareholder reports, where options are generally not expensed at all. nipa profits closely approximate those obtained from reports submitted for tax purposes, and, for obvious reasons, corporations tend not to inflate taxable earnings. consequently, nipa profits have been far less subject to the spin evident in reports to shareholders in recent years. nipa profits have increased sharply since the third quarter of last year, partly reflecting the dramatic jump in productivity and decline in unit labor costs. the difficulties of judging earnings trends have been intensified by revelations of misleading accounting practices at some prominent businesses. the resulting investor skepticism about earnings reports has not only