equipment and software to grow at a moderate pace this year, supported by high rates of profitability, strong business balance sheets, relatively low interest rates and credit spreads, and continued expansion of output and sales. investment in nonresidential structures ( such as office buildings, factories, and retail space ) should also continue to expand, although not at the unusually rapid pace of 2006. thus far, the weakness in housing and in some parts of manufacturing does not appear to have spilled over to any significant extent to other sectors of the economy. employment has continued to expand as job losses in manufacturing and residential construction have been more than offset by gains in other sectors, notably health care, leisure and hospitality, and professional and technical services, and unemployment remains low by historical standards. the continuing increases in employment, together with some pickup in real wages, have helped sustain consumer spending, which increased at a brisk pace during the second half of last year and has continued to be well maintained so far this year. growth in consumer spending should continue to support the economic expansion in coming quarters. in addition, fiscal policy at both the federal and the state and local levels should impart a small stimulus to economic activity this year. outside the united states, economic activity in our major trading partners has continued to grow briskly. the strength of demand abroad has helped to spur strong growth in u. s. real exports, which rose about 9 percent last year, and a robust world economy should continue to provide opportunities for u. s. exporters this year. growth in u. s. real imports slowed to about 3 percent in 2006, in part reflecting a drop in real terms in imports of crude oil and petroleum products. despite the improvements in trade performance, the u. s. current account deficit remains large, averaging 6 - 1 / 2 percent of nominal gdp during 2006. overall, the economy appears likely to continue to expand at a moderate pace over coming quarters. as the inventory of unsold new homes is worked off, the drag from residential investment should wane. consumer spending appears solid, and business investment seems likely to post moderate gains. this forecast is subject to a number of risks. to the downside, the correction in the housing market could turn out to be more severe than we currently expect, perhaps exacerbated by problems in the subprime sector. moreover, we could yet see greater spillover from the weakness in housing to employment and consumer spending than has occurred thus far. the possibility that

risks to this forecast are to the upside. in particular, upward pressure on inflation could materialize if final demand were to exceed the underlying productive capacity of the economy for a sustained period. the rate of resource utilization is high, as can be seen most clearly in the tightness of the labor market. indeed, anecdotal reports suggest that businesses are having difficulty recruiting well - qualified workers in a range of occupations. measures of labor compensation, though still growing at a moderate pace, have shown some signs of acceleration over the past year, likely in part the result of tight labor market conditions. to be sure, faster growth in nominal labor compensation does not necessarily portend higher inflation. increases in compensation may be offset by higher labor productivity or absorbed – at least for a time – by a narrowing of firms ’ profit margins rather than passed on to consumers in the form of higher prices. in these circumstances, gains in nominal compensation would translate into gains in real compensation as well. underlying productivity trends appear generally favorable, despite the recent slowing in some measures, and the markup of prices over unit labor costs is high by historical standards, so such an outcome is certainly possible. moreover, if the economy grows at a moderate pace for a time, as seems most likely, pressures on resource utilization should ease. however, a less benign possibility is that tight product markets might allow firms to pass some or all of their higher labor costs through to prices. in this case, increases in nominal compensation would not translate into increased purchasing power for workers but would add to inflation pressures. thus, the high level of resource utilization remains an important upside risk to continued progress in reducing inflation. in regard to monetary policy, the federal open market committee has left its target for the federal funds rate unchanged, at 5 - 1 / 4 percent, since last june. to date, the incoming data have supported the view that the current stance of policy is likely to foster sustainable economic growth and a gradual ebbing in core inflation. because core inflation is above the levels most conducive to the achievement of sustainable growth and price stability, the committee indicated in the statement following its recent meeting that its predominant policy concern remains the risk that inflation will fail to moderate as expected. however, the uncertainties around the outlook have increased somewhat in recent weeks. consequently, the committee also indicated that future policy decisions will depend on the evolution of the outlook for both inflation and economic growth, as implied by incoming information. thank you. i would be happy