, over the period. with these rapid increases in productivity, business costs were well contained and the rate of price inflation was stable, despite a fall in the unemployment rate to below 4 percent. of course, over the past year, productivity growth has slowed, increasing 1 - 1 / 4 percent at an annual rate over the first three quarters of 2001. this, in itself, is remarkable, given the historical tendency of productivity growth to turn negative when the economy enters recession. i believe that the reason for the good performance at this stage of the cycle is that the improvements in productivity growth that we have witnessed since the mid - 1990s have been largely structural and will persist for a time. the fundamental factor leading me to be cautiously optimistic that much of the improvement is likely to be sustained is my outlook for the state of technological advancement in the united states. as fed economists dan sichel and steve oliner have shown, one major source of the gains in output per hour were the high and rising levels of business investment, which raised the amount of capital per worker, thereby boosting productivity. booming investment in the 1990s owed importantly to steep declines in prices of high - tech equipment, which largely reflected rapid technical progress. about half a percentage point of the increase in productivity growth in the 1995 - 99 period can be attributed to this so - called capital deepening. i believe that technological progress will continue to drive down information technology costs in the coming years. moreover, businesses have reaffirmed their intentions to improve productivity by substituting cost - saving high - tech capital for labor. while there are certainly risks to the view that improvements in productivity growth will persist, i do not believe the terrorism of last fall is going to permanently harm increases in output per hour ( and thus the health of the economy ). most assuredly, in the aftermath of these attacks, many businesses have been forced to redirect resources from efficiency - enhancing investment to meet greater demands for security. businesses may also have been compelled to increase redundancy to cope with the greater potential for supply disruption. however, these effects will be mainly a one - time hit to the level of productivity. they are not likely to change the trend growth rate of output per hour. moreover, their effects will be ameliorated as businesses use new technologies and find creative ways to hold down the cost of enhancing security and providing for contingencies. conclusion obviously, 2001 was a challenging year. but the american people once again proved to be up to the

roger w ferguson, jr : developments in the u. s. economy - review and outlook speech by mr roger w ferguson, jr, vice - chairman of the board of governors of the us federal reserve system, before the economic club of colorado, denver, 16 january 2002. * * * i am pleased to address the economic club of colorado today. as always, the views i will be expressing are my own and are not necessarily shared by other members of the board of governors or of the federal open market committee. review of 2001 a confluence of factors shaped economic developments last year, and i would first like to review these factors, to provide a backdrop for assessing our economic prospects in the coming year. a year ago, signs of the recession that eventually unfolded were just beginning to materialize. after several years of booming growth, economic indicators started sending mixed signals. although consumer sentiment had dropped around the end of 2000, consumers were still spending at a healthy clip. while consumption growth had decelerated somewhat over the previous year, the modest slowing was consistent with the deceleration of aggregate demand necessary to better align supply and demand. businesses, however, appeared to be struggling. as data for the end of 2000 became available, it became clear that businesses - - amid disappointing sales and earnings - - had abruptly curtailed the record - setting expansion of investment spending. of course, some reduction of investment usually accompanies the recognition of a downshift in the economy, as firms bring their capital stocks in line with a revised outlook. but the severity of the adjustment last year appeared to reflect more than the usual reaction. businesses seemed to be reassessing the profitability of additional fixed capital in a more fundamental way. new capital, especially capital that embodies new technologies, continues to promise efficiency gains, but expectations seemed to have gotten ahead of even the more favorable reality, resulting in an unsustainable buildup of capital and run - up of equity market values. capital expenditures on high - tech equipment were especially hard hit. moreover, the sudden drop - off in business demand, coupled with some slowing in the consumer sector, apparently caught producers off guard. and despite rapid cuts in production, inventories piled up on shelves and at warehouses. early last year, manufacturers took steps to address the unwanted buildup and began liquidating inventories in earnest by slashing production of all types of goods. against this backdrop, the federal open market committee reduced the target for the federal funds rate sharply