alan greenspan : monetary policy and the economic outlook testimony of mr alan greenspan, chairman of the board of governors of the us federal reserve system, before the joint economic committee, u. s. congress, washington, 17 april 2002. * * * i appreciate the opportunity to appear before the joint economic committee to discuss the current state of the economy. as we noted in our statement following the federal open market committee meeting in march, “ the economy, bolstered by a marked swing in inventory investment, is expanding at a significant pace. nonetheless, the degree of strengthening in final demand over coming quarters, an essential element in sustained economic expansion, is still uncertain. ” little, if anything, has happened since the fomc meeting to alter that assessment. this morning i would like to elaborate on some of the forces that are likely to shape activity in the months ahead. as i just noted, the behavior of inventories currently is the driving force in the near - term outlook. stocks of goods in many industries were drawn down significantly last year, and preliminary data suggest that the pace of liquidation tapered off markedly in the first quarter. this development is important because the reduction in the rate of inventory liquidation has induced a rise in industrial production. the pickup in the growth of activity, however, will be short - lived unless sustained increases in final demand kick in before the positive effects of inventory investment dissipate. we have seen encouraging signs in recent months that underlying trends in final demand are strengthening, but the dimensions of the pickup are still not clear. a number of crosscurrents are likely to influence household spending this year. through much of last year ’ s slowdown, housing and consumption spending held up well and proved to be a major stabilizing force. but because there was little retrenchment during the cyclical downturn, the potential for a significant acceleration in activity in the household sector is likely to be more limited than in past business cycles. one important source of support to household spending late last year - - energy prices - - will likely be less favorable in the months ahead. with the rise in world crude oil prices since the middle of january, higher energy costs are again sapping the purchasing power of households. to the extent that the increase in energy prices is limited in dimension - - with prices not materially exceeding the trading range of recent weeks - - the negative effects on spending in the aggregate should prove to be small. however, a price hike that drove

exert some further damping effect on the overall growth of household spending relative to that of income. perhaps most central to the outlook for consumer spending will be developments in the labor market, which has improved some in recent months. the pace of layoffs quickened last fall, especially after september 11, and the unemployment rate rose sharply. but layoffs have diminished noticeably in 2002, and payrolls grew again in march. in typical cyclical fashion, the unemployment rate has lagged the pickup in demand somewhat, but it has remained between 5 - 1 / 2 and 5 - 3 / 4 percent of late, after rising rapidly in 2001. over the longer haul, incomes and spending are driven most importantly by the behavior of labor productivity. and here the most recent readings have been very encouraging. typically, labor productivity declines when output is cut back and businesses are reluctant to proportionately reduce their workforces. however, output per hour continued to grow last year. indeed, it rose at an annual rate of 5 - 1 / 2 percent in the fourth quarter of last year and appears to have posted another sharp advance in the first quarter. no doubt, some of the recent acceleration reflects normal statistical noise. more fundamentally, some of this pickup probably occurred because businesses have remained cautious about boosting labor input in response to the surprising strength of demand in recent months. but the magnitude of the gains in productivity over the past year provides further evidence of improvement in the underlying pace of structural labor productivity. this development augurs well for firms ’ ability to grant wage increases to their employees without putting upward pressure on prices. in housing markets, low mortgage interest rates and favorable weather have provided considerable support to homebuilding in recent months. moreover, attractive mortgage rates have bolstered the sales of existing homes and the extraction of capital gains embedded in home equity that those sales engender. low rates have also encouraged households to take on larger mortgages when refinancing their homes. drawing on home equity in this manner is a significant source of funding for consumption and home modernization. the pace of such extractions likely dropped along with the decline in refinancing activity that followed the backup in mortgage rates that began in early november. mortgage rates have gone back down again in recent weeks and are at low levels. this should continue to underpin activity in housing, but with perhaps less spillover to consumption more generally. the ongoing strength in the housing market has raised concerns about the possible emergence of a bubble in home prices.