alan greenspan : economic outlook testimonial by mr alan greenspan, chairman of the board of governors of the us federal reserve system, before the joint economic committee, us congress, washington dc, 3 november 2005. * * * mr chairman, when i last appeared before the joint economic committee in early june, economic activity appeared to be reaccelerating after a slowdown in the spring. the economy had weathered a further run - up in energy prices over the winter, and aggregate demand was again strengthening. real gross domestic product ( gdp ) growth averaged 3 1 / 2 percent at an annual rate over the first half of the year, and subsequent readings on activity over the summer were positive. by early august, the economy appeared to have considerable momentum, despite a further ratcheting up of crude oil prices ; pressures on inflation remained elevated. as you know, the economy suffered significant shocks in late summer and early autumn. crude oil prices moved sharply higher in august, bid up by growth in world demand that continued to outpace the growth of supply. then hurricane katrina hit the gulf coast at the end of august, causing widespread disruptions to oil and natural gas production and driving the price of west texas intermediate crude oil above $ 70 per barrel. because of a lack of ready access to foreign supplies, natural gas prices rose even more sharply. at the end of september, with the recovery from the first storm barely under way, hurricane rita hit, causing additional damage and destruction - - especially to the energy production and distribution systems in the gulf. most recently, hurricane wilma caused widespread power outages and property damage across the state of florida. these events are likely to exert a drag on employment and production in the near term and to add to the upward pressures on the general price level. but the economic fundamentals remain firm, and the u. s. economy appears to retain important forward momentum. of course, the higher energy prices caused by the hurricanes are being felt well beyond the gulf coast region. those higher prices resulted from the substantial damage that occurred to our nation's energy production and distribution systems. of the more than 3, 000 oil and gas production platforms in the paths of katrina and rita, more than 100 were destroyed, and an additional 50 suffered extensive damage. of the 134 manned drilling rigs operating in the gulf, 8 were lost, and an additional 38 were either set adrift by the storms or were badly damaged. at present, both oil and natural

- expected growth and lower - than - expected inflation. this “ odd couple ” has spawned a search for explanations. i have led a few expeditions myself and will try to extend my analysis further this afternoon. growth over 1997 probably exceeded 3½ % from the fourth quarter of 1996 through the fourth quarter of 1997, while inflation, measured by the cpi, was only about 2 % over the same period. this is a remarkable outcome, particularly in relation to the consensus forecast at the beginning of 1997. in february of 1997, for example, the blue chip consensus forecast projected just 2 % growth in gdp over 1997 and a 3 % increase in the cpi. the fomc consensus forecast and my own were not very different from this expectation. i would characterize the pace of output growth over 1997 as unsustainable, meaning that it was faster than the expansion of productive capacity and would ultimately be restrained going forward either by physical capacity constraints or by higher utilization rates, higher inflation, and policy tightening. the unemployment rate declined by about ¾ percentage point this past year, consistent with the observation that growth was above trend. most estimates would put the actual unemployment rate at the end of the year perhaps ¾ percentage point below the nairu. the picture that emerges is of an economy operating above its point of sustainable capacity and growing beyond its sustainable rate. but we clearly have not faced the usual consequence of over - taxing capacity constraints - - namely, an acceleration in prices. while wage gains did increase, albeit very modestly, over the year, inflation remained extraordinarily well contained. the core measure of the cpi decelerated about ½ percentage point and the overall cpi slowed more than 1¼ percentage points. stories i always think of defending a forecast or rationalizing an outcome relative to the forecast in terms of telling a story. by that i mean developing a theme or set of themes that tie together the projected or realized outcome and bring coherence to the data. what, then, is the story that brings coherence to the surprises of 1997? goldilocks. the most talked - about story for 1997 is goldilocks. this is a reference to goldilocks finding a bowl of porridge that was neither too hot nor too cold. the analogy is to an economy where growth is neither too fast nor too slow, allowing a comfortable and peaceful expansion without inflationary overtones. i like the story, but it is not the right one for 1997. in economic terms, gold