deterioration in short - term profitability and cash flow. pressures on profit margins and cash flows have been unrelenting. the earnings estimates of securities analysts for the s & p 500 in 2001, which presumably reflect the guidance that these analysts are getting from corporate management, have been revised downward by nearly 1 percent per week since february. to be sure, the pace of downward revision has slowed this month, but the adjustments remain negative. earnings weakness is evident pretty much across the board but especially for high - tech firms, where the previous extraordinary pace of expansion has left oversupply in its wake. much of the profit squeeze results from a rise in unit labor costs. gains in compensation per hour picked up over the past year, responding to a long period of very tight labor markets and the effects of an energy - induced run - up in consumer prices. faster increases in hourly compensation, coupled with the cyclical slowdown in the growth of output per hour, have elevated the rate of increase in unit labor costs. in effect, fixed costs, both labor and nonlabor, are being spread over a smaller production base for many industries. the sharp rise in energy costs has also pressed down directly on profit margins, especially in the fourth and first quarters. a substantial portion of the rise in total costs of nonfinancial, non - energy corporations between the second quarter of last year and the first quarter of this year reflected the increase in energy costs. prices paid for natural gas and petroleum products by these corporations continued to rise into the first quarter, but have eased this spring. electric power prices, however, continued to rise sharply through last month. going forward, the prospect for higher electricity costs is most pronounced, of course, in california. the rise in natural gas prices last quarter contributed directly and indirectly ( through its effect on the cost of electrical power generation ) much of the rise in overall energy costs for nonfinancial, nonenergy corporations. because we import little natural gas, higher prices largely result in a transfer of income from natural gas users to natural gas producers. nonetheless, these higher prices are likely to weigh on the economy in the short run because the increase in capital spending by energy producers is unlikely to offset the drag on spending by energy consumers. if overall final demand holds up reasonably well, the rate of inventory liquidation must begin to slow as inventory levels shrink toward operational targets. production and imports, taken together, would rise toward the level of final sales as inventories are brought into

to private yields probably reflects some expectation that the decline in the supplies of outstanding marketable treasury debt may not be as dramatic as earlier thought. still, the spread between rates on nominal ten - year treasury notes and inflation - indexed ten - year maturities has risen about half a percentage point since mid - march – not an insignificant change. interestingly, despite some apparent deterioration in actual and expected cpi inflation, there has been little acceleration in the broader index of core personal consumption expenditure prices. in that regard, the lack of pricing power reported overwhelmingly by business people underscores an absence of inflationary zest. undoubtedly businesses are feeling the effects of diminished pressures in product markets. with energy inflation probably peaking and the easing of tightness in labor markets expected to damp wage increases, prices seem likely to be contained. we have often pointed before to the essential role that low inflation expectations play in containing price pressures and promoting growth. any evident tendency in financial markets or in household and business attitudes for such expectations to trend higher would need to factor importantly into our policy decisions. forecasts of the suppression or re - emergence of inflation, like all forecasts, do not have an enviable record. faced with this inevitable uncertainty, a central bank's vigilance against inflation is more than a monetary policy cliche, it is, of course, the way we fulfill our ultimate mandate to promote maximum sustainable growth. a central bank can contain inflation over time under most conditions. but do we have the capability to eliminate booms and busts? can fiscal and monetary policy acting at their optimum eliminate the business cycle, as some of the more optimistic followers of j. m. keynes seemed to believe several decades ago? the answer, in my judgment, is no, because there is no tool to change human nature or to predict human behavior with great confidence. history suggests that risk premiums fall as the perceived threat of an economic downturn progressively fades. the longer an economy expands at a solid rate, the more people are likely to project that rate forward, eroding previous caution. this is a perfectly rational response. if people were accustomed to a three - year business cycle, they would exhibit far greater caution going into the third year of an expansion than if their normal experiences tended more to tenyear cycles. the dimensions of any expansion of course will be significantly affected by technological trends, wholly independent of people's evaluation of risk. and variations in technology and risk will appropriately affect asset prices to all