perceived high rates of return encouraged new firms, supported by investors eager for windfall financial gains, to enter these markets, and induced a record - setting expansion of capital spending. as it turned out, however, some of these investments were overly optimistic and capital markets were not sufficiently discriminating. the expected returns to the new equipment did not materialize, and many of the new high - tech start - ups went bankrupt. as a result, the economy was left with a bulge in corporate defaults for investors to absorb, and an overhang of high - tech capital, which has subsequently exerted a substantial drag on business spending and economic activity. the shakeout in the high - tech sector also contributed to a sharp decline in the stock market, and the resulting negative wealth effect has restrained consumer outlays. nevertheless, household spending, aided by solid income gains that were fueled by continued productivity growth and income tax cuts, held up quite well during the economic downturn. that strength has continued into this year, supported by low interest rates and substantial motor vehicle incentives. but, as i noted above, the absence of pent - up demand among consumers has limited the extent to which the household sector has contributed to growth this year. and the recent data on consumer spending have had a weaker tone of late as households continue to adjust to the hit taken by their balance sheets. in addition, foreign economic growth has remained relatively anemic. real gdp gains this year are running at annual rates of only 1 percent to 1 - 1 / 2 percent in the euro area and japan, and output is falling in parts of south america. this weakness in foreign activity has restrained the demand for our exports, with adverse consequences for u. s. manufacturers. another factor that seems to be limiting the economic recovery is the substantial uncertainty confronting decisionmakers. in particular, a series of unusual shocks has significantly buffeted the economy over the past year or so. chief among these were the terrorist attacks of september 11. the worst effects were obviously felt by the people directly touched by the tragedies. but the attacks also dealt a blow to our already weakened economy. several industries were seriously affected - - the air travel and airplane manufacturing industries being the clearest examples - - and activity in these industries is still well below its levels just before the attacks. the economy has proved to be more resilient than many initially anticipated, but the threat of additional attacks has undoubtedly affected some business decisions. this year, concerns about the

more persistent factors also continue to restrain the pace of recovery. consequently, the federal open market committee ( fomc ) now expects a somewhat slower pace of economic growth over coming quarters than it did at the time of the june meeting, when committee participants most recently submitted economic forecasts. consumer behavior has both reflected and contributed to the slow pace of recovery. households have been very cautious in their spending decisions, as declines in house prices and in the values of financial assets have reduced household wealth, and many families continue to struggle with high debt burdens or reduced access to credit. probably the most significant factor depressing consumer confidence, however, has been the poor performance of the job market. over the summer, private payrolls rose by only about 100, 000 jobs per month on average – half of the rate posted earlier in the year. 1 meanwhile, state and local the figure of 100, 000 private jobs per month adjusts for the effects of the two - week strike by communications workers at verizon, which held down measured payrolls in august. bis central bankers ’ speeches governments have continued to shed jobs, as they have been doing for more than two years. with these weak gains in employment, the unemployment rate has held close to 9 percent since early this year. moreover, recent indicators, including new claims for unemployment insurance and surveys of hiring plans, point to the likelihood of more sluggish job growth in the period ahead. other sectors of the economy are also contributing to the slower - than - expected rate of expansion. the housing sector has been a significant driver of recovery from most recessions in the united states since world war ii. this time, however, a number of factors – including the overhang of distressed and foreclosed properties, tight credit conditions for builders and potential homebuyers, and the large number of “ underwater ” mortgages ( on which homeowners owe more than their homes are worth ) – have left the rate of new home construction at only about one - third of its average level in recent decades. in the financial sphere, as i noted, banking and financial conditions in the united states have improved significantly since the depths of the crisis. nonetheless, financial stresses persist. credit remains tight for many households, small businesses, and residential and commercial builders, in part because weaker balance sheets and income prospects have increased the perceived credit risk of many potential borrowers. we have also recently seen bouts of elevated volatility and risk aversion in financial markets