in the prices of primary commodities. since such commodities are traded on world markets, lower demand from asia is reflected in lower prices world - wide, which benefit us producers that use commodities as inputs. this development serves as a short - run boost, a positive supply shock, to the us economy, one that also helps contain inflationary pressures, as does the more general decline in import prices as the us dollar appreciates. but the asian crisis can be expected to continue to have an adverse impact on trade - sensitive industries. some evidence of a deterioration of our trade balance with the region ’ s economies has already appeared. with little historical guidance to draw from, however, considerable uncertainty prevails regarding the extent to which the present asian situation may contribute to slower us growth as well as the timing of such a slowdown. for instance, despite expectations that the crisis would have contributed to a slowdown in economic activity earlier this year, the economy ’ s growth in the first quarter of this year exceeded even the remarkable performance of 1997. however, more recent data reflecting developments in the second quarter, including survey information, do give some evidence of a slowing in the overall economy, especially the manufacturing sector, perhaps due to asian financial turmoil. as you might suspect, we will continue to watch incoming data quite closely as the year progresses to get a better handle on this situation. to be sure, uncertainties such as these have loomed large at times in the past, and we can learn much from those experiences. the uncertainties faced by policymakers during the 1970s about the economy ’ s potential provide an enlightening perspective on the present situation. following a period of rapid productivity gains during the 1950s and 1960s, the economy ’ s performance during the 1970s appeared out of line with previous experience. starting in 1973, in particular, inflation rose more than expected, at times considerably ’ so, while economic growth tended to disappoint expectations for a number of years. at first, it appeared reasonable to assume that the observed productivity ’ slowdown was temporary. reflecting this assumption, for instance, the council of economic advisors gave a 4 percent estimate of potential output growth in the 1974 economic report of the president, as would have been consistent with the earlier trends. increased uncertainty regarding this estimate was evident in the 1975 and 1976 reports, but not until 1977 was the point estimate of potential output growth revised downward, to 3. 6 percent. as the economy ’ s performance continued to disappoint, further downward revisions

proponents of this view considered 6 percent a reasonable estimate of the nairu. since 1995, however, the unemployment rate has been below this level, and substantially below of late, while inflation has continued to progress toward our price - stability objective. in response, over the past few years, many observers have revised their estimates of the nairu down by half a percentage point or more. yet considerable uncertainty remains about the confidence with which the new estimates can be relied upon for evaluating inflationary pressures. the nairu never was measured with precision ; statistical inference has always provided a distribution of likely values around a point estimate. and several factors, for instance the demographic composition of the labor force, have long been known to introduce systematic variation in its value over time. nonetheless, the uncertainties about how structural forces may be changing the nairu seem unusually large at present and cannot be ignored. and for some the present uncertainties have called into further question the basic usefulness of the concept, or at least of a point estimate held with any confidence. a related uncertainty concerns the underlying trend growth of labor productivity. until fairly recently, this trend had seemed to have been about constant since the mid 1970s. but there are many that believe that a pickup may have occurred in the last few years, and a faster productivity trend would help to explain the unexpectedly favorable economic growth - unemployment - inflation nexus in recent years. unfortunately, much as with the nairu, our understanding of the forces that drive the productivity trend is less than perfect. certainly, the investment boom of the current expansion has raised the amount of capital for each worker and contributed to an increase in labor productivity, and it may be that advancing technology is making the capital stock and workforce more productive. however, some of the recent pickup in productivity is the normal response to the faster output growth of late, so the degree to which there is a new higher trend remains an open question. another difficulty in assessing the current amount of slack in the economy, and a third uncertainty, concerns the divergent patterns in alternative measures of excess demand. capacity utilization in manufacturing and the rate of unemployment have historically moved together over the cycle. unexpectedly, they have diverged in the current expansion, in part as the surge in investment has kept capacity utilization in the manufacturing sector near its historic average while labor markets have become tighter and tighter. recent developments in south - east asia also have contributed to uncertainty about the current monetary policy environment. one place where the effect of the crisis is being felt is