production in the goods - producing part of the economy, where previous levels of production had been sufficiently low that inventories of goods had been falling. the current level of production can be sustained, but for ongoing growth in production what is needed is expansion in demand and prospects for demand are regarded as, to use the current language of choice, “ uncertain ”. it is not that demand is falling - it is growing. the issue is to what extent, and how soon, it might accelerate. in this context, the behaviour of business investment has been nominated ( by the federal reserve, for example ) as crucial. after such a prolonged period of massive capital investment, there was a very sharp fall - off in capital spending by us businesses during 2001. it was this component of demand which was responsible for pushing the us into recession. the pace of decline looks like it began to abate in the early part of 2002, but it is not clear when investment spending might actually pick up again. central to the outlook for investment will be the state of us corporate profits. the chart shows the best available measure of economic profits, from the us national accounts, measured as a share of us gdp. there was a period of strong profit growth from 1994 to 1997, but then the profit share tended to drift lower, before falling sharply during the first nine months of 2000. us corporations acted to reduce costs with alacrity over the past year. profits then began to recover in the last quarter of 2001 and, based on preliminary information for the march quarter, that has probably continued. equity analysts who make forecasts are expecting continued very strong growth in earnings over the coming year. those inclined to have reservations about the robustness of the us recovery would wonder whether earnings growth expectations might be somewhat optimistic ( and, for that matter, whether profits were actually as strong as commonly believed in the late phases of the expansion ). that is not to argue that the us recovery, which is clearly under way, will peter out, just that it might be a fairly moderate affair compared with some other recoveries. nonetheless, it is apparent that a pick - up of some degree is under way in profits, and even a moderate overall recovery after a fairly shallow recession is a good outcome. furthermore, given that the us economy has surprised many by its resilience to date, there has to be the possibility that it will continue to do so. aspects of the asian region turning to the asian region, we have seen encouraging evidence that

a more severe and protracted recession than has, in fact, turned out to be the case. we at the rba became quite concerned about this as well, not so much because of the terrorist attacks per se - whose direct short - term economic impact we thought likely to be relatively small - but simply because economic problems can accumulate towards the end of long expansions, which then intensify any subsequent downturn. arguably, the us economy had acquired some such imbalances - with some asset values falling from very high levels, an unusually high level of business investment raising the question of whether there might have been over - investment, and questioning in some quarters about whether consumer spending had run too far ahead of income. as things have turned out, fears of a sharp slump have not been realised. on the contrary, as of may 2002, it seems that the us has begun to recover from what now appears to have been the shallowest recession in recent history, at least as measured by the behaviour of gdp. using the metric of unemployment, if it wasn ’ t the shallowest recession in recent times, it was close. this is a better outcome than most thought likely during the second half of last year, and is much better than the “ downside risk ” scenarios which were contemplated at that time. reflecting these outcomes, forecasters stopped continually downgrading their assessments about the future earlier this year, and have become more confident over recent months that global economic activity will strengthen as 2002 progresses and that 2003 will be a pretty good year. they expect this to be led by an improving us, with europe and east asia turning up as well. not much contribution to growth is expected from japan in the short term, but at least performance there is not expected to worsen. there is, of course, a long way to go to see whether those expectations turn out to be correct, but they are not unreasonable expectations to hold in the present circumstances. the us turning point is clearly already behind us. it is pretty obvious, furthermore, that macroeconomic policies in the us are exerting a considerable expansionary impetus. in fact, monetary policies in almost all countries have been quite easy over the past year, which in itself increases the probability that growth will strengthen rather than fade away. in short, while it is not time to throw our hats in the air about the world economy, things look distinctly better than six months ago. aspects of the us economy it is worth dwelling for a little while