to cumulate over time, with progressively larger increases in supply coming as time goes by. separately, businesses may respond to the increase in trend productivity growth by stepping up the pace of their investment in plant and equipment, further boosting the growth in the supply potential of the economy. how does the increase in trend productivity growth play out on the demand side of the economy? one immediate effect is the step - up in capital expenditures that i just noted, as businesses perceive and react to new profit opportunities. in addition, stock market investors will react to the pickup in productivity growth by looking ahead, recognizing the improved prospects for future earnings, and bidding up equity prices today. the run - up in equity prices implies a reduction in the cost of capital for businesses, which could support a further increase in investment demand, especially on the part of firms that rely on this market for at least part of their funding. the increase in stock market wealth will also operate through the household sector. as you know, economists often speak of the " wealth effect. " econometric modeling indicates that consumers eventually tend to raise the level of their spending by approximately 3 to 5 cents for every incremental dollar of wealth. given changes in stock market wealth as large as the ones we have seen recently, this wealth effect can have a noticeable effect on consumption and macroeconomic performance. to take the most prominent example, the wealth effect is the most important reason why the personal saving rate in the united states has fallen from roughly 8 percent in 1990 to - 1 percent in the first quarter of this year. and to put a rough number on the impact on aggregate activity more recently, simulations by the board staff using our econometric model of the economy suggest that wealth generated in the equity markets over the past four years added about 1 percentage point to the growth rate of real gdp. overall, the stock market, working through the spending decisions of both households and businesses, will act to bring forward the demand effects of the improved outlook for supply, potentially even pushing demand up ahead of the increase in supply. it is important to emphasize that higher productivity growth translates into higher real income growth for employees. this added income is seen most clearly in the higher wages paid to that growing number of workers whose cash compensation is tied to company performance, either directly or through stock options. but real incomes should increase even for workers whose compensation is not directly linked to company performance, as profitable business opportunities bolster the demand for scarce labor. conclusion obviously the history of

i believe that the answer to the question is that most of the growth in productivity was structural, or trend, and not cyclical. we should also be mindful that even during the period between 1995 and 2000, productivity increases on a quarterly basis fluctuated ; the trend increase that is so clear now did not progress unabated. two fundamental factors lead me to be cautiously optimistic that the much of the improvement in productivity is likely to be sustained. notable advances in microprocessors, or semiconductors, have been key to the enhanced productivity growth that we have experienced. semiconductor industry experts indicate that the improvement in performance described by " moore's law, " which predicts that the capacity of chips will double every 18 to 24 months, continues to hold true. my understanding from conversations with, and announcements by, leaders of the semiconductor industry is that later this year or early next year chip manufacturers plan to begin using larger wafers, allowing them to reduce costs by 30 percent. they also plan to adopt thinner circuit lines, which will allow the manufacturers to etch more transistors on a single chip. a second reason to expect that much of the improvement in productivity growth is trend and not cyclical is that businesses indicate in their words and their deeds a commitment to improving productivity and maintaining costs by substituting capital, mainly it capability, for labor. overall growth of the economy has slowed to a pace between 1 percent and 2 percent at an annual rate for the most recent three quarters. however, investment in equipment and software has held at relatively high levels and is still sufficient to maintain relatively rapid growth of capital services. moreover, end - use demand for communications services seems to remain strong. since the early 1990s, the volume of data sent over networks in the united states has doubled each year, and there is no reason why that trend should abate. the role of government policy you will have noted that i have not mentioned the role of government policy in creating a higher rate of trend productivity growth. as a policymaker, i'd like to think that well - executed monetary and fiscal policies – each focused importantly on their respective long - run goals – played some role in creating economic conditions that fostered noninflationary economic growth. it is important to note, however, that although sound policy undoubtedly helped create the conditions for growth, macroeconomic policy cannot create growth itself. only businesses and consumers can do that. the economy of the united states has also benefited from past actions by