in recent months it has shown signs of stabilizing, but remains well below the fomc ’ s expressed goal of 2 percent for total inflation. fortunately, inflation expectations remain relatively stable at levels somewhat above the current inflation rate. this stability should help prevent an undesirable further drop in inflation relative to our 2 percent objective. that said, there are some nascent signs that the economy may be doing better. for example, based on the first estimate, which is subject to revision, real gdp increased at a 2. 8 percent annual rate in the third quarter of 2013, above the trend of the past four years. and the most recent payroll employment report showed a pickup in the monthly pace of job gains. the 3 - month moving average rose back above a 200, 000 pace after slowing to about 150, 000 as of july of this year. i hope that this marks a turning point for the economy. but before we rush to this conclusion, a few more cautionary comments are appropriate. with respect to gdp growth, it turns out that inventory investment contributed ¾ of a percentage point to that overall growth rate. thus, because this impetus from inventories will bis central bankers ’ speeches likely reverse this quarter, the real gdp growth rate is likely to slow to around a 2 percent annual rate or a bit less in the fourth quarter. with respect to payroll employment, we have seen such bursts in payroll growth before over the past few years and have been disappointed when the pickups proved temporary and did not lead to a rise in the overall growth rate. but, i have to admit that i am getting more hopeful. not only do we have some better data in hand, but also the fiscal drag, which has been holding the economy back, is likely to abate considerably over the next few years at the same time that the fundamental underpinnings of the economy are improving. the first thing to note is that federal fiscal policy in 2013 has been unusually contractionary. at the beginning of the year the payroll tax cut expired while tax rates on higher income households were raised, a series of taxes associated with the affordable care act took effect, and spending was reduced due to the sequester and the gradual winding down of foreign military operations. according to the congressional budget office, the cyclicallyadjusted or full - employment budget balance increased by roughly 1 ¾ percentage points of gdp in fiscal year 2013. over the past 50 years there have been only two other episodes of fiscal contraction of

, for a technology - driven rise in the prospective rate of return on new capital, and an associated acceleration in labor productivity is compelling, if not conclusive. starting in 1993, capital investment, especially in high - tech equipment, rose sharply beyond normal cyclical experience, presumably, as always, the result of expected increases in rates of return. had the profit expectations not been realized, one would have anticipated outlays to have fallen back. instead, their growth increased through the remainder of the decade. more direct evidence supporting an improved underlying profitability has become increasingly evident in company data. it seems likely that the synergies of advances in laser, fiber optic, satellite, and computer technologies with themselves and with older technologies have enlarged the pool of opportunities to achieve a rate of return above the cost of capital. the bulge in the exploitation of these “ excess ” potential rates of return has been stimulated by the accelerating decline in the prices of high - tech equipment starting in 1995. the amount of capacity plowed into limited areas of technology led to extra heavy price discounting. the rapid pace of innovation that has fostered shortened product life cycles also has contributed to driving down prices of high - tech equipment. few business people report any significant perceived diminution of the backlog of these as yet unexploited profitable synergies. in recent years, businesses often have indicated a capability to dip into this backlog for capital investments that can quickly displace labor costs should they be perceived as about to rise. this view is reinforced by securities analysts who presumably are knowledgeable about the companies they follow. this veritable army of technicians has been projecting increasingly higher five - year earnings growth, on average, since early 1995, according to i / b / e / s, a wall street research firm that compiles these estimates for the s & p 500. in january 1995, the analysts projected five - year earnings to rise on average by about 11 percent annually. after successive upward revisions, the march 1999 estimate was set at about 13. 5 percent ( profit weighted ), a peak for this expansion. while there are ample data to conclude that these estimates are biased upward, there is scant evidence to suggest the bias has changed. there appears little reason to doubt that analysts ’ continuous upward revisions reflect what companies are reporting to them about improved cost control, which on a consolidated basis for the economy overall, adds up to accelerating labor productivity. the alternative explanations — more rapid growth in