the stage for a renewed pickup in private spending growth. of course, with inflation quite low and with significant excess capacity remaining in labor and product markets, we will need to remain watchful for any additional signs of economic weakness. households surely won ’ t be able to maintain spending growth indefinitely without renewed gains in employment, and a pickup in job creation will require that businesses become more sanguine about their future profit opportunities. at the federal reserve, we will continue to weigh incoming data and changing forecasts. but i expect that the economy will pull out of this period of weakness and that the natural resilience of the economy and the stimulative effects of monetary and fiscal policy will show through more clearly over the coming year.

the united states continue to look favorable. a key question in assessing those longer - run prospects is whether productivity growth in the years ahead will more closely resemble the substantial gains evident since 1995 or whether it will revert to the weaker performance of the period from 1973 to 1995. the most recent record of productivity growth reinforces the view that future growth will follow the higher trend of the past halfdecade. productivity is a cyclical variable that typically falls in recessions. however, during the most recent downturn, productivity never declined and instead continued to grow at a fairly strong pace. moreover, after september 11, many economists feared that productivity growth would suffer a severe setback as businesses diverted resources to improving security and developing contingencies in the event of another terrorist attack. instead, according to labor department data released last week, output per hour in the nonfarm business sector has risen 5. 3 percent over the past four quarters, its best performance since 1983. how should we interpret this truly extraordinary performance? cyclical forces probably played some role. and, as i noted, increased caution has probably pushed many companies to find ways to get more productivity from their workers. but these efficiency gains were likely facilitated by the capital investments of recent years. adjusting to new technologies takes time, and it is plausible that such an adjustment process has continued to boost productivity this year. while cyclical forces and lags in the assimilation of new technologies have been important, their influence is likely to be transitory. more fundamentally, i believe that the trend in productivity has ratcheted up, and this development has been the driving force behind the recent extraordinary productivity growth. thus, it seems to me that with last week ’ s easing in monetary policy, the pieces are in place to engender a gradual strengthening in economic activity in coming quarters. with the real federal funds rate now below zero, monetary policy is providing considerable support to the interest - sensitive sectors of the economy. similarly, fiscal policy remains conducive to growth. the uncertain mood among businesspeople - - and more recently households - - may continue to damp spending for a while longer. but with inventories now seemingly in better alignment with sales and with much of the restructuring associated with the high - tech overhang now behind us, some important sources of economic weakness over the past two years should begin to disappear. as a result, with underlying productivity gains likely to remain strong, business profits and household income should resume their uptrend, setting