alan greenspan : 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, us congress, washington dc, 9 june 2005. * * * chairman saxton, vice chairman bennett, and members of the committee, i am pleased to appear once again before the joint economic committee. over the past year, the pace of economic activity in the united states has alternately paused and quickened. the most recent data support the view that the soft readings on the economy observed in the early spring were not presaging a more - serious slowdown in the pace of activity. consumer spending firmed again, and indicators of business investment became somewhat more upbeat. nonetheless, policymakers confront many of the same imbalances and uncertainties that were apparent a year ago. our household saving rate remains negligible. moreover, modest, if any, progress is evident in addressing the challenges associated with the pending shift of the baby - boom generation into retirement that will begin in a very few years. and although prices of imports have accelerated, we are, at best, in only the earliest stages of a stabilization of our current account deficit - a deficit that now exceeds 6 percent of u. s. gross domestic product ( gdp ). a major economic development over the past year has been the surge in the price of oil. sharply higher prices of oil imports have diminished u. s. purchasing power. the value of petroleum imports rose from 1. 4 percent of nominal gdp in the first quarter of 2004 to 1. 8 percent in the first quarter of this year. the alternating bouts of rising and falling oil prices have doubtless been a significant contributor to the periods of deceleration and acceleration of u. s. economic activity over the past year. despite the uneven character of the expansion over the past year, the u. s. economy has done well, on net, by most measures. real gdp has grown by 3. 7 percent over that period, the unemployment rate has fallen to 5. 1 percent, and core personal consumption expenditure prices have risen a historically modest 1. 6 percent. but the growth of productivity, though respectable at 2 - 1 / 2 percent over the year ending in the first quarter, is far less than the extraordinary pace of 5 - 1 / 2 percent during 2003. excluding a large but apparently transitory surge in bonuses and the proceeds of stock option exercises late last year, overall hourly labor compensation has exhibited

only loosely connected local markets. thus, while investors can arbitrage the price of a commodity such as aluminum between portland, maine, and portland, oregon, they cannot do that with home prices because they cannot move the houses. as a consequence, unlike the behavior of commodity prices, which varies little from place to place, the behavior of home prices varies widely across the nation. speculation in homes is largely local, especially for owner - occupied residences. for homeowners to realize accumulated capital gains on a residence - a precondition of a speculative market - they must move. another formidable barrier to the emergence of speculative activity in housing markets is that home sales involve significant commissions and closing costs, which average in the neighborhood of 10 percent of the sales price. where homeowner sales predominate, speculative turnover of homes is difficult. but in recent years, the pace of turnover of existing homes has quickened. it appears that a substantial part of the acceleration in turnover reflects the purchase of second homes - either for investment or vacation purposes. transactions in second homes, of course, are not restrained by the same forces that restrict the purchases or sales of primary residences - an individual can sell without having to move. this suggests that speculative activity may have had a greater role in generating the recent price increases than it has customarily had in the past. the apparent froth in housing markets may have spilled over into mortgage markets. the dramatic increase in the prevalence of interest - only loans, as well as the introduction of other relatively exotic forms of adjustable - rate mortgages, are developments of particular concern. to be sure, these financing vehicles have their appropriate uses. but to the extent that some households may be employing these instruments to purchase a home that would otherwise be unaffordable, their use is beginning to add to the pressures in the marketplace. the u. s. economy has weathered such episodes before without experiencing significant declines in the national average level of home prices. in part, this is explained by an underlying uptrend in home prices. because of the degree of customization of homes, it is difficult to achieve significant productivity gains in residential building despite the ongoing technological advances in other areas of our economy. as a result, productivity gains in residential construction have lagged behind the average productivity increases in the united states for many decades. this shortfall has been one of the reasons that house prices have consistently outpaced the general price level for many decades. although we certainly cannot rule out