Statements to Congress - Statements by Alan Greenspan to the Senate Committee on the Budget and the Senate Committee on Finance

Federal Reserve Bulletin, March, 1997

Statement by Alan Greenspan, Chairman, Board of Governors of the Federal Reserve System, before the Committee on the Budget, U.S. Senate, January 21, 1997

I am pleased to appear here today. In just a few weeks the Federal Reserve Board will submit its semiannual report on monetary policy to the Congress. That report and my accompanying testimony will cover in detail our assessment of the outlook for the U.S. economy and the challenges facing monetary policy. This morning, I would like to offer some personal perspectives on the current economic situation.

I think it is fair to say that the overall performance of the U.S. economy has continued to surpass most forecasters' expectations. The current cyclical upswing is now approaching six years in duration, and the economy has retained considerable vigor, with few signs of the imbalances and inflationary tensions that have disrupted past expansions. Although the data for the fourth quarter are still incomplete, it is apparent that real gross domestic product posted an increase in the neighborhood of 3 percent over the four quarters of 1996. This increase may seem quite moderate compared with the gains registered in some earlier years of the postwar period; however, at a time when the working age population is expanding relatively slowly and unemployment is already low, this economic growth is appreciable indeed. It was enough to generate more than 2 1/2 million new payroll jobs last year and to cause the unemployment rate to edge down to 5 1/4 percent--a figure roughly matching the low of the last cyclical upswing, in the late 1980s. But, in contrast to that earlier period, we have not experienced a broad increase in inflation; in fact, by some important measures of price trends, inflation actually slowed a bit in 1996.

The balance and solidity of the expansion last year can be seen in the composition of the growth. Notably, consumers appear to have been rather conservative in their spending. In some instances, they may have been constrained by the debt-service burdens accumulated over the previous few years; but in the aggregate, households experienced an enormous further accretion of net worth as the stock market continued to climb at a breathtaking rate. Judging from historical patterns, such an increase in wealth might have inspired households to spend an enlarged share of their current income; but, if we take the available data at face value, households appear instead to have set aside a greater share of their income for financial investment. Perhaps Americans are finally becoming conscious of the need to accumulate additional assets to ensure not only that they can handle temporary interruptions in employment but also that they will have the wherewithal to enjoy a lengthy retirement down the road.

Be that as it may, the increased flow of private savings--and a reduced call upon those savings by the Treasury--helped to fund substantial increases in fixed investment last year. Homebuilding activity was up considerably; notably, single-family housing starts were robust once again and helped to push the nation's homeownership rate to a fifteen-year high. In addition, business fixed investment posted another strong advance. Firms acquired large amounts of computing and telecommunications equipment in particular, seeking to enhance the efficiency of their operations as well as their overall productive capacity. At the same time, they accumulated inventories rather cautiously: Stock-to-sales ratios, which had risen in 1995, were in many cases near historic lows as of November 1996, the most recent month for which statistical information is available.

The growing economy had beneficial effects on the finances of many states and localities, which consequently could spend more on needed infrastructure and vital services and, in some instances, trim taxes. Of course, overall government sector purchases were held down by the ongoing efforts to reduce the federal deficit. It clearly was private demand that drove economic growth last year.

To be more specific, it was domestic private demand that did so, for net exports fell, on balance, in 1996. The volume of goods and services we sold abroad grew appreciably, despite moderate economic expansion by our major trading partners, but our imports continued to grow at a rapid clip. In fact, imports provided a safety valve in a U.S. economy marked by a high degree of resource utilization.

I have already noted that our unemployment rate reached the lowest level in some time. Moreover, throughout the year, we heard reports from around the country that qualified workers were in tight supply. Although increases in hourly compensation remained relatively subdued--an important fact to which I shall return in a few moments--they did become more sizable, and they raised unit costs when employers were unable to enhance productivity commensurately. Thanks to the very substantial additions to facilities in the past few years, physical capacity in the manufacturing sector was not greatly strained.