easier producing goods and services for both retirees and active workers will be. immigration policy will, therefore, be a key component of baby - boom retirement policy. the rate of saving - - for retirement and other purposes - - may not directly affect either the number of retirees or the size of the workforce. but it surely affects capital investment, which it finances, and the productivity that it engenders. besides the total amount of saving and investment, changes in the allocation of those funds among different types of capital also appear to influence the growth of labor productivity. a dollar of new saving flows through financial markets to firms that allocate it among different types of capital investment. clearly, firms'choices about the types of investments to make matter crucially for how much labor productivity ultimately is boosted. in the late 1990s, for example, businesses allocated much more of their investment dollars toward high - tech, higher - return capital than they did in earlier years. businesses made this shift and are continuing to move further in that direction in response to the extremely rapid decline in the prices of high - tech assets and the new opportunities that these assets have afforded. according to one set of calculations, of the roughly 2 - 1 / 2 percent annual rate of increase in output per hour, or labor productivity, between 1995 and 2001, perhaps a quarter of that growth could be attributed to on - going shifts in the composition, as distinct from the dollar level, of capital. improvements in the quantity and quality of our workforce ’ s education enhance workers'skills and contribute importantly to the growth of labor productivity. but far more important over the past six years have been the gains in output attributable to technological innovation, especially information technology and improved managerial organization, and, as i noted in testimony last week, the greater flexibility and resilience of our economy stemming from deregulation, primarily in finance. notwithstanding these more - intangible contributions, the level of saving remains a key ingredient of economic growth. but we need also to know whether the source of that saving is sustainable and, beyond that, whether the type of financial assets in which our saving overall is accumulated affects our productivity. during the past six years, about 40 percent of the total increase in our capital stock in effect has been financed, on net, by saving from abroad. this situation is reflected in our ongoing current account deficit, which, by definition, is a measure of our net investment in domestic plant and equipment financed with foreign funds,

september 11 and the unemployment rate rose sharply. however, layoffs diminished noticeably in january, and employment turned up last month. moreover, initial claims for unemployment insurance have decreased markedly, on balance, providing further evidence of an improvement in labor market conditions. the dynamics of inventory investment and the balance of factors influencing consumer demand will have important consequences for the economic outlook in coming months. but the broad contours of the present cycle have been, and will continue to be, driven by the evolution of corporate profits and capital investment. the retrenchment in capital spending over the past year and a half was central to the sharp slowing we experienced in overall activity. on balance, the recovery in spending on business fixed investment is likely to be only gradual ; in particular, its growth will doubtless be less frenetic than in 1999 and early 2000 - - a period during which outlays were boosted by the dislocations of y2k and the extraordinarily low cost of equity capital available to many firms. nonetheless, if the recent morefavorable economic developments gather momentum, uncertainties will diminish, risk premiums will fall, and the pace of capital investment embodying new technologies will increase. even a subdued recovery would constitute a truly remarkable performance for the american economy in the face of so severe a decline in equity asset values and an unprecedented blow from terrorists to the foundations of our market systems. for if the tentative indications that the contraction phase of this business cycle has drawn to a close are ultimately confirmed, we will have experienced a significantly milder downturn than the long history of business cycles would have led us to expect. although there are ample reasons to be cautious about the economic outlook, the recuperative powers of the u. s. economy in the recent past have been encouraging. one important ingredient in that resilience has been the performance of productivity. even discounting somewhat the phenomenal strength of the growth of output per hour of late, one cannot help but be impressed with how well productivity has held up in the face of the abrupt slowing of the economy in late 2000 and in 2001. that performance has been encouraging because the nation ’ s fortunes, to a very great degree, will depend on the evolution of the growth of productivity. in particular, productivity will play a central role in determining the nature of the economy ’ s response to the aging of the population soon upon us. most economic forecasts are subject to significant uncertainty. at least by