alan greenspan : the economic outlook testimony of mr alan greenspan, chairman of the board of governors of the us federal reserve system, before the joint economic committee, us congress, washington dc, 9 june 2005. * * * chairman saxton, vice chairman bennett, and members of the committee, i am pleased to appear once again before the joint economic committee. over the past year, the pace of economic activity in the united states has alternately paused and quickened. the most recent data support the view that the soft readings on the economy observed in the early spring were not presaging a more - serious slowdown in the pace of activity. consumer spending firmed again, and indicators of business investment became somewhat more upbeat. nonetheless, policymakers confront many of the same imbalances and uncertainties that were apparent a year ago. our household saving rate remains negligible. moreover, modest, if any, progress is evident in addressing the challenges associated with the pending shift of the baby - boom generation into retirement that will begin in a very few years. and although prices of imports have accelerated, we are, at best, in only the earliest stages of a stabilization of our current account deficit - a deficit that now exceeds 6 percent of u. s. gross domestic product ( gdp ). a major economic development over the past year has been the surge in the price of oil. sharply higher prices of oil imports have diminished u. s. purchasing power. the value of petroleum imports rose from 1. 4 percent of nominal gdp in the first quarter of 2004 to 1. 8 percent in the first quarter of this year. the alternating bouts of rising and falling oil prices have doubtless been a significant contributor to the periods of deceleration and acceleration of u. s. economic activity over the past year. despite the uneven character of the expansion over the past year, the u. s. economy has done well, on net, by most measures. real gdp has grown by 3. 7 percent over that period, the unemployment rate has fallen to 5. 1 percent, and core personal consumption expenditure prices have risen a historically modest 1. 6 percent. but the growth of productivity, though respectable at 2 - 1 / 2 percent over the year ending in the first quarter, is far less than the extraordinary pace of 5 - 1 / 2 percent during 2003. excluding a large but apparently transitory surge in bonuses and the proceeds of stock option exercises late last year, overall hourly labor compensation has exhibited

encouraged by the strong growth in labor productivity over the past two quarters, which, if sustained, could contribute to further progress toward price stability. i believe that a soft landing is possible, with continued disinflation and a strong labor market, but it is not assured. in setting monetary policy, we need to seek a policy stance that is sufficiently restrictive to bring inflation back to 2 percent over time. i see risks as two sided, requiring us to balance the risk of not tightening enough against the risk of tightening too much. we have seen continued momentum in economic growth and consumer spending, even in the face of monetary policy tightening over the past year and a half. there is a risk that such continued momentum in demand could keep the economy and labor market tight and slow the pace of disinflation. but i am also attuned to the risk of an unnecessarily sharp decline in economic activity and employment. some parts of the economy are showing strain from tighter financial conditions. households at the lower end of the income and wealth distributions have largely exhausted their excess savings, while delinquencies on auto loans and credit cards have risen to pre - pandemic levels or higher. small businesses generally borrow for shorter terms than larger businesses, and they are facing tighter credit conditions and higher rates as they roll over those short - term loans. homebuilders have done surprisingly well over the past year and a half, but they see the current level of mortgage rates as substantially slowing demand. as we try to identify the full, lagged effects of monetary policy tightening, i am considering whether small businesses, the housing sector, and low - and moderateincome households could be warning of broader stress ahead. the linkages we are talking about today connect us in ways that are economically beneficial but also have the potential to transmit stress. for that reason, i am also attentive to the risk of renewed global economic shocks. in recent weeks, oil prices have been volatile but are down from their september peaks. amid highly elevated geopolitical tensions, however, the risk of a sharp rise in global energy prices remains salient. i also see signs of subdued economic growth in our major trading partners, whose health affects u. s. economic conditions related to our dual mandate. china's economic growth has remained below pre - pandemic rates, and activity in its property sector has been extremely weak. in europe, recent data point to muted growth as the region deals with