For release: Aug. 26, 2002
Contact: Joe Elstner, (314) 444-8902 or (314) 640-3526 (cell); Charles B. Henderson (314) 609-5972 (cell)

Low Inflation, Higher Productivity
Continue to Highlight U.S. Economy,
Says St. Louis Fed's Poole

Link to speech

St. Louis — The basic health of our economy in recent years, and most probably for years to come, is substantially better than it used to be. Inflation is low and steady, and expected to remain so. Productivity growth is up, and expected to remain so. Those are two key features of our economic situation over the longer run."

Those were the viewpoints of Federal Reserve Bank of St. Louis President William Poole in remarks today to the Midwestern States Association of Tax Administrators.

"If the last 25 years have taught us anything," Poole said, " it is that our economy does much better when inflation is low and stable, and equally important, when firms and households expect it to remain that way. The current period of low and stable inflation occurred because the Federal Reserve successfully implemented a strategy to achieve and maintain that outcome."

Poole said that in the long run, a nation's standard of living, often measured as the growth of real gross domestic product (GDP) per capita, is a function of labor productivity growth. Between 1973 and 1994, he said, labor productivity averaged 1.4 percent growth per year. Since 1995, labor productivity growth has averaged about 1 percentage point higher. "Recent revisions lowered the estimate of the average growth rate of labor productivity over the past three years by about a quarter of a percentage point. Nevertheless, productivity growth remained robust by historical standards during the 2001 recession, giving credibility to the forecast that the productivity slowdown of 1973-1994 is indeed truly over."

Poole noted a "marked downshift" in U.S. economic growth activity since late 2001. "Output growth has been modest and employment growth almost nil." Most press attention, he said, is on real GDP growth, but "focusing on final sales yields a better understanding of the recovery process." Poole said that after rising at a "fairly robust" 4.2 percent annual rate in 2001's fourth quarter, real final sales growth slowed to a 2.4 percent annual rate during the first quarter of 2002, then contracted a bit in the estimated results for second quarter, falling at a 0.1 percent rate. "Other information also supports the basic picture of an economy that is growing only slowly, and that is the main point," Poole said.

Poole also said that the financial press is "filled with stories about the possibility the economy might slip back into recession. From a historical standpoint, the likelihood of a double-dip is remote, since there's been only one in the post-World War II era. The short 1980 recession was followed by a four-quarter recovery and then by the deep
1981-82 recession." He added that the climate that spawned that double-dip—high and rising inflation, poor public policies and a major oil shock—is notably absent this time. "Expectations of low and stable inflation are entrenched, and the banking system is well-capitalized, making credit readily available to credit-worthy firms," Poole said.

Poole said a "baseline scenario" that is widely accepted in the markets calls for GDP to grow at about 2 and 1/2 percent over the second half of 2002, with growth gradually picking up next year and settling at about 3 and 1/2 percent toward the end of 2003. In that scenario, Poole said, forecasters expect employment to grow at a rate of about 1 percent per year and productivity to grow at a rate of about 2 and 1/2 percent per year, yielding GDP growth of about 3 and 1/2 percent per year. "Of course," he said, "both of these projections are subject to error, especially the rate of productivity growth."

Poole said that the economic recovery does not depend on the Federal Open Market Committee's (FOMC) timing its policy adjustments exactly right. "That's an unreasonable standard to apply to judging the FOMC, and fortunately not at all necessary," he said. "As I have repeatedly emphasized, one of the great benefits of achieving low and stable inflation is that this environment makes the economy less sensitive to the exact timing of policy adjustments. Market participants have entrenched expectations that the Fed will do what is necessary to maintain this low-inflation environment for years to come."

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