contain the weakness and head off a more serious slackening. this was to be just the first installment of a series of policy easings to counter the weakness in the economy that emerged over the first half of last year. in the business sector, a serious retrenchment in spending and production was under way. in addition to the initial causes of the pullback, the abruptness of the slowing seemed to jar business confidence, leading firms to postpone spending while they reassessed their situations. in this way, the investment downturn became self - reinforcing. at the same time, financial developments, including a stronger dollar, sharply lower equity prices, and tighter lending standards at banks and in security markets, tended to offset some of the influence of the lower federal funds rate. by midyear, investment - - and high - tech investment in particular - - was posting some of the largest decline in decades. the weaker job market and lower stock prices also began to weigh on consumers, though to a much lesser extent. with overall sales sagging, inventories remained excessive in many sectors. as the weakness in the economy intensified, policymakers responded. in june, president bush signed the economic growth and tax relief reconciliation act of 2001 into law. the first installment of the reduction in personal income tax rates went into effect in july. in addition, the act provided tax rebates of $ 300 to $ 600 per household that were paid directly to taxpayers. as for monetary policy, between march and june, the fomc voted to ease monetary policy four more times, bringing the cumulative reduction in the federal funds rate to 275 basis points in the first six months of the year - - the most rapid reduction in the funds rate since the early 1980s. despite both fiscal and monetary efforts to bolster sagging aggregate activity, by late summer only a few hard signs had surfaced that recovery was at hand. the terrorist attacks on september 11 - - whose worst effects were felt by those people and their families directly touched by the tragedies - - were a blow to our already weakened economy. in the weeks immediately following those events, most forecasters expected the damage to the economy to be extensive. the initial effects on the airlines and the travel industry were severe. also, a rapid deterioration of business and consumer confidence seemed highly probable. in addition to immediate crisis - related injections of liquidity, the federal reserve moved to address the perceived shock to the macroeconomy by lowering the federal funds

terrorist attacks, two aspects of last year's slowdown were atypical. first, the main source of the negative hit to demand was a large shock to capital expenditures. in the past fifty years, investment spending has nearly always begun its decline one to four quarters after the peak of the economic cycle, not before it. what started out as a very gradual cooling of an overheated economy became much more serious because of the severe shakeout that hit the high - tech sector. second, consumer spending on goods and services - - which represents about two - thirds of the gross domestic product - - held up remarkably well last year. in the past, consumption spending has almost always declined as a recession started. but last year, despite a sharp drop in consumer confidence and a decline in wealth from lower equity values, households kept buying. at this point, it is still too early to classify this recession as mild or severe. in general, economic fluctuations in the past fifteen to twenty years have been tamer than their counterparts in earlier eras. economists have conjectured that this is so because improved technologies allow businesses to monitor their demand more closely and manage their inventories better. recent developments ought to give us more evidence on this subject. one thing is certain : because of the unusual, investment - led nature of this recession, we cannot put too much weight on the shape and profile of past recoveries in trying to predict this one. current situation and near - term outlook that said, the data we have received in recent weeks have been encouraging and suggest that economic activity is in the process of turning up. although payroll employment continued to fall in january, the pace of that decline was slower than in the fourth quarter of last year. initial claims for unemployment insurance have moved lower over the past two months - - another hopeful sign of recovery. industrial production fell in january, but here, too, the rate of decline was well below the pace in preceding months. as we obtain more information on spending patterns since september, the behavior of households is increasingly proving to be the key stabilizing force on economic activity. sales of cars and light trucks - though down from the extraordinary rates of the fourth quarter - - have continued at quite healthy rates. in addition, retail sales outside motor vehicles were very strong in both december and january. housing construction, too, has been robust, bolstered in part by favorable weather and low mortgage rates. in the business sector, the very rapid pace at which companies liquidated