, consumer spending continued to trend up, while low mortgage rates have kept both home sales and new housing starts close to record highs. in addition, the economic environment now seems more conducive to business investment. for much of the past three years, businesses were reluctant to invest in new capital equipment. at first, the downturn in investment seemed to be a reaction to what in hindsight appears to have been a substantial overinvestment in high - tech equipment in the late 1990s. as business investment subsequently lagged the improvement in household spending, however, a marked degree of caution seemed to settle on the business community. this caution - which appears to have had its roots in the uncertainty associated with terrorism, geopolitical risks, and a wave of corporate governance scandals - induced firms to focus on restructuring rather than expanding their operations, and it left them quite hesitant to increase their investment outlays. by the middle of last year, however, firms were beginning to boost their capital spending. and, in the second half, real fixed investment rose more than 10 percent at an annual rate, the fastest two - quarter rate of increase since early 2000. to be sure, a sizable portion of the recent strength in investment has been for high - tech equipment, and much of it probably reflects replacement of outdated machines rather than an expansion of existing production capacity. however, spending on other types of equipment now seems to be picking up as well, and the caution that had previously restrained capital spending seems to be in the process of lifting. against this backdrop, inflation has remained quite low despite some sizable increases in energy prices. overall, the consumer price index increased 1. 7 percent over the twelve months ending in february, while the core index - which excludes the volatile food and energy components - increased only a little more than 1 percent. outlook and labor market uncertainties the consensus in the forecasting community is that gdp growth will not continue at the 6 percent pace posted in the second half of last year. but, with interest rates still quite low and fiscal policy generally stimulative, most forecasters are projecting relatively robust gains in output for the coming year, with ongoing increases in both household and business spending. continued strong economic expansion seems to me, as well, to be the most likely outcome. nonetheless, the economic outlook still bears some important uncertainties, two of which i would like to focus on today. the first relates to the labor market. as has been widely recognized, one notable

more productive and earn higher wages but also allowing those who lose their jobs to gain reemployment in more stable jobs with less loss in earning power. with experienced workers, society ’ s challenge is to provide opportunities for those adversely affected by economic change to build on their previous work experience and to retool their skills to meet the changing requirements of the economy. an important source of such opportunity has been our community colleges, which have experienced sizable increases in enrollments since the early 1970s, particularly among adults. in addition, many four - year public colleges and universities now offer programs specifically tailored to the schedules of adults, many of whom are attempting to balance part - time schooling with family and work responsibilities. for our future workforce, we must ensure that our educational system is adequately equipping students with the greater skills demanded by employers operating in an increasingly complex economy. i do not have the answers to these educational challenges. but i do know how important it is that we address them. and given our successes in the past, i am confident that we can. financial health of households let me now turn to a second important uncertainty in the outlook - namely, the financial health of u. s. households. as i mentioned earlier, a key element in the current cyclical expansion has been robust spending for consumption and housing. an oft - expressed concern has been that many households have become overextended, will eventually have to cut back on spending, and in doing so may short - circuit the expansion. it is easy to see the basis for this concern. first, consider the rise in household debt. relative to disposable income, debt has been hitting record highs annually since 1993. indeed, with house prices rising rapidly and interest rates at historically low levels, mortgage borrowing surged 12 - 1 / 2 percent in each of the past two years, twice the rate of growth of disposable income. meanwhile, the personal bankruptcy rate, although relatively stable in recent quarters, is still near its record high. despite these ominous sounding numbers, and while remaining alert to the possibility of more acute financial distress, i believe that, in the aggregate, households fundamentally are in good financial shape. even with the heavy borrowing they have undertaken, households have kept their debt - payment burdens in check. at the aggregate level, one can evaluate debt burdens in two ways. one measure is the debt service ratio. the numerator of this ratio is the minimum payment required on mortgage