other industries have been small. initially, there had been some concern that sars would disrupt the just - in - time inventory systems of u. s. manufacturers. many of those systems rely on components from asia, and any disruption in the flow of these goods has the potential to affect production in the united states. so far, however, u. s. manufacturing output has not been noticeably affected. in recent months, inflation has dropped to very low levels. as i noted earlier, energy prices already are reacting to the decline in crude oil prices, and core consumer price inflation has been minimal. inflation is now sufficiently low that it no longer appears to be much of a factor in the economic calculations of households and businesses. indeed, we have reached a point at which, in the judgment of the federal open market committee, the probability of an unwelcome substantial fall in inflation over the next few quarters, though minor, exceeds that of a pickup in inflation. mr. chairman, the economic information received in recent weeks has not, in my judgment, materially altered the outlook. nonetheless, the economy continues to be buffeted by strong cross currents. recent readings on production and employment have been on the weak side, but the economic fundamentals - including the improved conditions in financial markets and the continued growth in productivity - augur well for the future.

hostilities to make a firm judgment about the current underlying strength of the real economy. incoming data on labor markets and production have been disappointing. payrolls fell further in april, and industrial production declined as well. because of the normal lags in scheduling production and in making employment decisions, these movements likely reflect business decisions that, for the most part, were made prior to the start of the war, and many more weeks of data will be needed to confidently discern the underlying trends in these areas. one reassuring development that has been sustained through this extended period of economic weakness has been the performance of productivity. to the surprise of most analysts, labor productivity has continued to post solid gains. businesses are apparently continuing to discover unexploited areas of cost reduction that had accumulated during the boom years of 1995 to 2000 when the projected huge returns from market expansion dulled incentives for seemingly mundane cost savings. the ability of business managers to reduce costs, especially labor costs, through investment or restructuring is, of course, one reason that labor markets have been so weak. looking ahead, the consensus expectation for a pickup in economic activity is not unreasonable, though the timing and extent of that improvement continue to be uncertain. the stance of monetary policy remains accommodative, and conditions in financial markets appear supportive of an increased pace of activity. interest rates remain low, and funds seem to be readily available to creditworthy borrowers. these factors, along with the ability of households to tap equity accrued in residential properties, should continue to bolster consumer spending and the purchase of new homes. the recent declines in energy prices are another positive factor in the economic outlook. the price of west texas intermediate crude oil dropped back to below $ 26 per barrel by the end of april, but as indications of a delay in the restoration of iraqi oil exports became evident and geopolitical risks crept back in, prices have risen to near $ 30 a barrel - a worrisome trend if continued. nonetheless, the price of crude oil is still about $ 10 per barrel below its peak in february. this decline has already shown through to the price of gasoline in may. some modest further declines in gas prices are likely in coming weeks, as marketers ’ profit margins continue to back off from their elevated levels of march and april to more normal levels. in contrast, prices for natural gas have increased sharply in response to very tight supplies. working gas in storage is presently at extremely low levels, and the normal seasonal rebuilding of these