Statement by Alan Greenspan, Chairman, Board of Governors of the Federal Reserve SYstem, before the Committee on Finance, U.S. Senate, January 25, 1995

Federal Reserve Bulletin, March, 1995

Statement by Alan Greenspan, Chairman, Board of Governors of the Federal Reserve System, before the Committee on Finance, US. Senate, January 25, 1995

I am pleased to be able to appear here today, to offer my thoughts on the economic backdrop for your policy discussions.

The US. economy has recorded some notable achievements over the past few years, but there is nonetheless much left to be accomplished. The fiscal decisions made by the Congress in the next several months will play a critical role in determining the economic welfare of our citizens over the years--indeed, the decades--to come.

I perhaps should begin with a brief review of the current condition of the economy. There is no question that the past year was one of remarkable progress along many dimensions of macroeconomic performance. The official estimates for the fourth quarter are not yet available, but it is clear that real gross domestic product expanded about 4 percent over the course of 1994-the best gain in some time, and one that surpassed most expectations. Importantly, we saw an accelerated expansion of employment as well. Cumulatively, payrolls have now increased roughly 6 million over the past couple of years, belying in dramatic fashion the notion that had developed earlier in this decade that our economy had lost its job-generating ability. With the rapid growth of employment, the national unemployment rate has fallen sharply, to less than 5 1/2 percent this past month.

The economic gains have been broad. They have encompassed almost all major segments of industry and all parts of the country. The expansion in recent quarters has been paced by growth of business investment and exports, and, as a consequence, we have seen not only a continuation of robust increases in service sector employment but also a significant upturn in job creation in the manufacturing sector. Manufacturing output increased 6.8 percent last year, and measured factory employment rose almost 300,000. I say "measured" because it has been true for some time now that manufacturers have relied to an increasing degree on workers supplied by temporary help firms, which are recorded separately in the service industry. But it is clear that last year saw a significant gain in the overall factory work force. Moreover, I would note the reports in the recent "Beige Book" survey assembled by our regional Reserve Banks that manufacturers now are expressing a greater inclination to add workers directly to their payrolls. This is a sign of the greater confidence that firms now have that future levels of activity will remain high.

Geographically, contractions in some sectors such as defense and finance have left their negative imprint on certain locales, but rising activity and improving job opportunities have characterized most areas of the country. Notably, California--accounting for roughly one-eighth of the nation's economy--appears to be in the process of turning around. Unemployment rates have fallen in all regions and are now lower in most than they were at the peak of the last business cycle expansion. Moreover, the gains in employment have benefited all major demographic segments of the labor force as well.

Of crucial importance to the sustainability of these gains, they have been achieved without a deterioration in the overall inflation rate. The consumer price index (CPI) rose 2.7 percent last year, the same as in 1993. Inflation at the retail level, as measured by the CPI, has been a bit less than 3 percent for three years running now--the first time that has occurred since the early 1960s. This is a signal accomplishment, for it marks a move toward a more stable economic environment in which households, businesses, and governmental units can plan with greater confidence and operate with greater efficiency. When we consider the probable upward bias of the CPI, it would appear that we have gotten close to achieving effective price stability, though we are not there yet.

In 1994, we had a difficult reversal in monetary policy to navigate. The overhang of debt and the strains that emerged among our financial intermediaries, especially out of the commercial real estate collapse of the late 1980s, required a heavy dose of monetary ease beginning in 1989 to alleviate a significant credit crunch. The danger of overstaying that policy of ease was clear, particularly as we moved through 1993, but the right time to change course was difficult to determine. Judging from the developments of the past year, it appears that our policy reversal last February was timely--but we will not know for sure except in retrospect.

As I have stated many times in congressional testimony, I believe firmly that a key ingredient in achieving the highest possible levels of productivity, real incomes, and living standards is the achievement of price stability. Thus, I see it as crucial that we extend the recent trend of low and, hopefully, declining inflation in the years ahead. The prospects in this regard are fundamentally good, but there are reasons for some concern, at least with respect to the nearer term. Those concerns relate primarily to the fact that resource utilization rates already have risen to high levels by recent historical standards. The current unemployment fate, for example, is comparable to the average of the late 1980s, when wages and prices accelerated appreciably. The same is true of the capacity utilization rate in the industrial sector.