alan greenspan : capital gains trends in the united states opening remarks by alan greenspan, chairman of the board of governors of the us federal reserve system, at a symposium sponsored by the federal reserve bank of kansas city, jackson hole, wyoming on 31 august 2001. * * * the rapid technological innovation that spurred the advancement of the “ information economy ” has resulted in some dramatic capital gains and losses in equity markets in recent years. these remarkable developments have attracted considerable attention from economists and from macroeconomic policymakers. at the same time, movements in the prices of some other assets in the economy - changes in house prices, for example - have been steadier, less dramatic, but perhaps no less significant. there can be little doubt that sizable swings in the market values of business and household assets have created important challenges for policymakers. after having been relatively stable for a number of decades, the aggregate ratio of household net worth to income rose steeply over the second half of the 1990s and reached an unprecedented level by early last year. that ratio has subsequently retraced some of its earlier gains. but we must ask whether the aggregate ratio of net worth to income is a sufficient statistic for summarizing the effect of capital gains on economic behavior or, alternatively, whether the distribution of capital gains across assets and the manner in which those gains are realized also are significant determinants of spending. to answer these questions, we need far more information than we currently possess about the nature and the sources of capital gains and the interaction of these gains with credit markets and consumer behavior. analysts have long factored changing asset values into models that seek to explain consumption and investment. indeed, in recent years, household wealth variables have become increasingly important quantitatively in endeavors to track consumer spending. the importance of household balance sheet variables for explaining consumption and the possibility that not all these variables influence spending identically suggest the need for greater disaggregation than is typically employed in most models. observing that, over the past half century, consumer spending has amounted to about 90 percent of income, it might appear that income is largely sufficient to explain consumption. however, econometric evidence suggests that such numbers may be deceptive. wealth by itself now appears to explain about one - fifth of the total level of consumer outlays, according to the board ’ s large - scale econometric model, leaving disposable income and other factors to explain only four - fifths of consumption. indeed, if

. prospects for further economic expansion in europe and japan appear good in the near term. and despite indications of moderation in some countries, the overall pace of economic activity in emerging economies, including china, appears to be strong. turning now to the inflation outlook, in february the twelve - month change in core personal consumption expenditure ( pce ) prices was 2. 4 percent, and in march the year - over - year change in the core consumer price index ( cpi ) was 2. 5 percent. each of those readings was higher than the corresponding result for early 2006. increases in market rent and in owners'equivalent rent account for much of that acceleration. prices of consumer goods in both the pce and cpi measures have been relatively flat for the past two years, while prices of services other than energy and shelter have been rising at about a 3 percent rate. my forecast of a gradual slowing in inflation reflects my view that making further progress in lowering inflation is desirable. although i expect that core inflation will drift down, i recognize that achieving further reductions in inflation may take time. in the near term, the recent rebound in prices for gasoline and other petroleum - based goods is likely to put upward pressure on the costs of many non - energy goods and services. moreover, the evolution of shelter costs, which have boosted core inflation over the past year, is difficult to predict. here, my expectation is that as the supply of rental units increases and the market for owner - occupied housing stabilizes, the rise in rent will slow. other concerns about prospects for inflation are related to developments on the supply side of the economy. since last fall, the jobless rate has been hovering around 4 - 1 / 2 percent, a relatively low level by historical standards, and it fell to 4. 4 percent this past month. with the labor market that tight, i am not surprised that our business contacts have been reporting shortages of workers in some occupations – both skilled and unskilled, depending on the region – and some associated wage pressures. to date, various measures of worker compensation are giving mixed signals on whether wages are accelerating. the narrowest measure, the average hourly earnings of production or nonsupervisory workers, shows a noticeable pickup in wage inflation from 3 percent in 2005 to around 4 percent more recently ; another measure, hourly compensation in the nonfarm business sector rose in 2006 at close to 5 percent, also faster than a year earlier. but the employment cost index has been rising at a moderate