to another large gain in the first quarter. investment should continue to be spurred by several factors : the accelerator effects of sales growth, favorable cash flow and financial conditions, ongoing opportunities to upgrade capital stocks with new technologies, and for this year, partial expensing. meanwhile, the decline in the dollar over the past two years and faster growth among our trading partners suggest that less of the strengthening of our domestic demand will be met by higher imports than it would be otherwise, and that rising exports will help to stimulate production in the united states. indeed, the global nature of the pickup in economic activity encourages me to think that we are seeing a fundamental turnaround in confidence and spending propensities that is likely to be self - reinforcing. all told, the u. s. economy has apparently made the transition from weakness to solid growth. however, even if these positive signs are borne out, the path of economic expansion will undoubtedly be uneven, and significant risks remain. one downside risk lies in spending by the household sector. purchases of new houses and durable goods have boomed over the past several years, raising the stocks of those capital goods in the hands of households. in addition, the saving rate is very low by historical standards. i expect that the growth in household investment will taper off, but a more pronounced pullback in spending cannot be ruled out, especially once interest rates rise. some observers have expressed concern that weakness in hiring, should it persist, would hold down the growth of labor income and weigh on consumer confidence, and thus could depress spending at some point. in recent quarters, however, slow hiring has been accompanied by strong productivity growth. over time, higher productivity will show up in higher wages. but even in the short - run, these new efficiencies have boosted capital income, and the resulting increases in dividend income and stock prices have, in the aggregate, provided at least a partial offset to restrained growth of wages and salaries. on the upside, business spending could turn out to be even more robust than i expect. businesses ’ caution about making commitments to meet future demand appears still to be eroding only slowly. should confidence return more quickly, we could see a more marked strengthening in capital spending, inventory accumulation, and hiring. the transition from extraordinary to merely rapid growth of potential aggregate supply the transition to more - rapid and self - sustaining increases in aggregate demand is critical to the outlook, but it is only part of the story. the full

the first time in forty years, inflation in the united states might fall too low. the incoming data contain some indications that underlying inflation is no longer declining, but the evidence is inconclusive thus far. in particular, recent monthly changes in core prices have been within the range of increases seen in 2003, but this flattening out of inflation has not persisted long enough to be clearly distinguished from the normal volatility in these data. still, if aggregate demand and potential aggregate supply follow the paths that i outlined earlier, the slack in resource utilization should diminish, unit labor costs should begin to move higher, and the underlying rate of inflation should stabilize. sources of potential upward pressure on prices have become more prominent in recent months. overall inflation has been boosted by a jump in energy prices. such a jump could raise core inflation temporarily if it is passed through to other prices or if it contributes to increasing inflation expectations. indeed, by several measures, near - term inflation expectations have risen of late. however, futures market participants have priced in some decline in energy prices from these elevated levels ; and even if energy prices remain high, they would not be adding to inflation over time. another factor some observers have cited as possibly boosting inflation is a tendency for increases in resource utilization to generate bottlenecks that can push up some prices more rapidly. indeed, periods like the current one with rising global demand have often been accompanied by marked accelerations in the prices of crude and, to a lesser extent, intermediate materials, which seem to be most sensitive to changes in demand. but this variation in upstream producer prices has left little imprint on consumer prices in the past - perhaps because these inputs account for a small share of the final value of industrial output and even less of total consumption. a related concern is the effect of a declining dollar on import prices and the prices of competing domestic goods. over time, however, foreign producers seem to be absorbing a greater share of the impact of a falling dollar in their profit margins rather than passing it on fully in their prices, and i expect the drop in the dollar to have only a modest effect on u. s. inflation. at the same time, other forces are likely to be acting to restrain inflation. importantly, slack in resource utilization will probably be eliminated only gradually, so competition for jobs and for market share should remain intense. in addition, because hourly compensation has lagged productivity, unit labor costs have fallen markedly. the resulting markup of prices over unit