clearly contributed to a fending off, if only temporarily, of some of the pressures on our balance of payments. the stresses on the global savings pool resulting from the excess of domestic private investment demands over domestic private saving have been mitigated by the large federal budget surpluses that have developed of late. in addition, by substantially augmenting national saving, these budget surpluses have kept real interest rates at levels lower than they would have been otherwise. this development has helped foster the investment boom that in recent years has contributed greatly to the strengthening of us productivity and economic growth. the congress and the administration have wisely avoided steps that would materially reduce these budget surpluses. continued fiscal discipline will contribute to maintaining robust expansion of the american economy in the future. just as there is a limit to our reliance on foreign saving, so is there a limit to the continuing drain on our unused labor resources. despite the ever - tightening labor market, as yet, gains in compensation per hour are not significantly outstripping gains in productivity. but as i have argued previously, should labor markets continue to tighten, short of a repeal of the law of supply and demand, labor costs eventually would have to accelerate to levels threatening price stability and our continuing economic expansion. the more modest pace of increase in domestic final spending in recent months suggests that aggregate demand may be moving closer into line with the rate of advance in the economy ’ s potential, given our continued impressive productivity growth. should these trends toward supply and demand balance persist, the ongoing need for ever - rising imports and for a further draining of our limited labor resources should ease or perhaps even end. should this favorable outcome prevail, the immediate threat to our prosperity from growing imbalances in our economy would abate. but as i indicated earlier, it is much too soon to conclude that these concerns are behind us. we cannot yet be sure that the slower expansion of domestic final demand, at a pace more in line with potential supply, will persist. even if the growth rates of demand and potential supply move into better balance, there is still uncertainty about whether the current level of labor resource utilization can be maintained without generating increased cost and price pressures. as i have already noted, to date costs have been held in check by productivity gains. but at the same time, inflation has picked up - even the core measures that do not include energy prices directly. higher rates of core inflation may mostly reflect the indirect effects of energy prices, but the federal reserve

, all of the aforementioned hypotheses, of course, must be provisional. it is certainly premature to make a definitive assessment of either the recent trends in household spending or what they mean. but it is clear that, for the time being at least, the increase in spending on consumer goods and houses has come down several notches, albeit from very high levels. in one sense, the more important question for the longer - term economic outlook is the extent of any productivity slowdown that might accompany a more subdued pace of production and consumer spending, should it persist. the behavior of productivity under such circumstances will be a revealing test of just how much of the rapid growth of productivity in recent years has represented structural change as distinct from cyclical aberrations and, hence, how truly different the developments of the past five years have been. at issue is how much of the current downshift in our overall economic growth rate can be accounted for by reduced growth in output per hour and how much by slowed increases in hours. so far there is little evidence to undermine the notion that most of the productivity increase of recent years has been structural and that structural productivity may still be accelerating. new orders for capital equipment continue quite strong - so strong that the rise in unfilled orders has actually steepened in recent months. capital - deepening investment in a broad range of equipment embodying the newer productivity - enhancing technologies remains brisk. to be sure, if current personal consumption outlays slow significantly further than the pattern now in train suggests, profit and sales expectations might be scaled back, possibly inducing some hesitancy in moving forward even with capital projects that appear quite profitable over the longer run. in addition, the direct negative effects of the sharp recent runup in energy prices on profits as well as on sales expectations may temporarily damp capital spending. despite the marked decline over the past decades in the energy requirements per dollar of gdp, energy inputs are still a significant element in the cost structure of many american businesses. for the moment, the dropoff in overall economic growth to date appears about matched by reduced growth in hours, suggesting continued strength in growth in output per hour. the increase of production worker hours from march through june, for example, was at an annual rate of ½ percent compared with 3¼ percent the previous three months. of course, we do not have comprehensive measures of output on a monthly basis, but available data suggest a roughly comparable deceleration. a lower overall rate of economic growth