randall s kroszner : outlook and risks for the us economy remarks by mr randall s kroszner, member of the board of governors of the us federal reserve system, at the institute of international finance 2007 spring membership meeting, athens, greece, 1 june 2007. * * * thank you for inviting me to participate in this conference and offer my views on prospects for the u. s. economy. i should note that the opinions i will express today are my own and not necessarily those of my colleagues on the federal open market committee. after increasing at about a 3 - 1 / 2 percent annual rate from early 2003 to early 2006, the pace of economic expansion in the united states stepped down last spring, with real gross domestic product rising since then at about a 2 percent pace. yesterday, the department of commerce announced that real gdp increased at an annual rate of 0. 6 percent in the first quarter, a downward revision of its earlier estimate. activity was held down in the first quarter, in part, by several factors that seem likely to prove transitory – for example, a drop in exports, a significant reduction in inventory investment, and a decline in defense spending. my view and, it seems, the view of many private forecasters is that economic growth will pick up as we move through the year, with the rate of expansion close to potential by 2008. in recent quarters, weakness in the housing market has been the major source of the slowdown in the growth of real gdp. indeed, declines in real residential investment held down the growth of output nearly 1 - 1 / 4 percentage points in the second half of last year and another 1 percentage point in the first quarter of this year. after an extended boom in housing, the demand for homes began to weaken in mid2005. by the middle of 2006, sales of both new and existing homes had fallen considerably from their peak levels. homebuilders responded to the drop in demand by sharply curtailing construction. even so, the inventory of unsold homes rose dramatically. sales of new homes weakened further in the first part of this year, and the inventory of unsold homes continued to rise. the latest data for the housing market have been mixed. sales of single - family existing homes fell 2 - 1 / 2 percent in april to a level 5 percent below the rate posted in the second half of last year. in the market for new homes, however, sales jumped in april, which brought them back in

/ 2 percent. it then accelerated to a rate of about 3 percent during the first half of this decade despite a recession, the fall of the dot - com market, a broad stock market correction, terrorism, and corporate governance scandals. however, in the early part of 2006, productivity growth slowed markedly, and it has increased at less than a 1 percent rate over the past four quarters. the recent deceleration raises the possibility that the trend has slowed significantly. if the trend has slowed, that could have important implications for the conduct of monetary policy. but the deceleration also could reflect, at least in part, cyclical dynamics in response to a slowing economy. indeed, estimates of trend productivity from a variety of outside forecasters, which generally range from 2 percent to 2 - 3 / 4 percent, point to the possibility that much of the recent weakness will prove transitory. of course, the middle of this range would suggest a modest slowdown from the consensus estimate from a year or so ago, which was around 2 - 1 / 2 percent. in any event, the possibility of a slowing in trend productivity is a risk to the outlook that i will continue to monitor. another potential influence on inflation is the degree of pressure on resources. 1 in the labor market, the unemployment rate declined over the course of 2006 from about 5 percent to 4 - 1 / 2 percent, and so far this year it has remained close to that level. reflecting the tightening of the labor market as well as the pressure on top - line inflation from increases in energy prices in recent years, the rate of increase in hourly compensation, although volatile, appears to be moving up. but the markup of prices over unit labor costs is still high by longer - run standards, and the wide margin implies that firms have the capacity to absorb increases in unit labor costs, at least for a while. as for price inflation, over the twelve months ending in april, the consumer price index excluding food and energy was up 2. 3 percent, the same increase as in the preceding twelve months. inflation as measured by the price index for personal consumption expenditures excluding food and energy rose 2. 1 percent over the twelve months ending in march ( the latest available data ). the most recent consensus forecast for total cpi inflation ( on a fourth - quarter to fourth - quarter basis ) is 3. 0 percent in 2007 and 2. 4 percent in 2008. 2 the anticipated moderation in inflation apparently reflects the expectation that the impetus from