For release: Dec. 20, 2002

U.S. Economy "Fundamentally Sound," Outlook Positive for 2003-04, Says St. Louis Fed's Poole

link to speech

St. Louis — Looking ahead at the US economy in 2003-04, William Poole takes the side of those pointing to flexible markets, rapid innovation, high productivity growth and low inflation as linchpins for a return to solid economic growth during 2003-2004.

Poole, president of the Federal Reserve Bank of St. Louis spoke at an AAIM Management Association seminar. "I'm not a professional forecaster, but a consumer of forecasts," Poole said. "Since even the experts' forecasts can have a considerable range, I place a lot of weight on the so-called Consensus forecast of the Blue Chip Economic Indicators. First, it seems likely that growth in household spending on durable and nondurable goods will remain around 3 percent, moderately slower than that for the late 1990s and the last four quarters.

"Second, whether near-term real gross domestic product (GDP) growth is faster or slower than the Consensus expects will depend crucially on business outlays for capital goods. Right now, a majority of forecasters expects the pace of fixed investment to be stronger in the second half of 2003." Poole said the timing of the fixed investment recovery is "very uncertain," due to the high investment rate in the late 1990s, relatively high vacancy rates in commercial buildings, a guarded outlook for corporate profits, uncertainties associated with possible war in Iraq and the threat of future terrorist attacks.

Poole said his basic message was that, "while the economy is still working through some adverse developments…it has displayed an extraordinary resiliency. The economy is fundamentally sound; our underlying economic strength has carried us through some difficult times."

Poole noted that the economy has done about as well as expected in 2002. "So why are so many so glum these days? Part of the story is that forecasters were right for the average, but wrong on the pattern over the year," he said. Although forecasters generally predicted growth barely above zero early in the year followed by about 4 percent growth in the second half, events played out differently. "After growing at a 2.7 percent annual rate in the fourth quarter of 2001, real GDP surged to a 5 percent growth rate in 2002's first quarter," Poole said. "Those two quarters were certainly a surprise in the wake of 9/11. The economy slowed appreciably to 1.3 percent growth in second quarter, but accelerated again to a 4 percent rate during the third quarter. The soft patch in the fourth quarter finishes the year on a down note, and that's partly why so many are so glum."

Poole said that one of the "most noteworthy" features in this year's recovery is the weak demand for labor. "At one level, the reluctance of firms to vigorously compete for labor in today's economy reflects the modest growth of output and aggregate demand," said Poole. "Yet at another level, firms may be reluctant to boost employment during this recovery because they've found ways to meet demand through improved production processes. Productivity growth has this year been considerably higher than what is normally seen in a period of modest output growth."

Poole said it's important not to get caught up in high frequency data and neglect longer-term issues. "The Fed's primary input to conditions promoting high growth in employment and output is to pursue policies to maximize prospects for low, stable inflation," he said. "The evidence is that the Federal Reserve has been successful in this regard. Current inflation rates, by most measures, are low, possibly near zero in some cases when measurement biases are considered."

Given that success, Poole said, "the current situation is not one in which monetary policymakers can afford to relax. Monetary policy is very accommodative right now. Short-term interest rates are exceptionally low and money growth is strong. Given the downward pressures slowing the economy's recovery, this stance has been appropriate. As I've emphasized on several occasions, this stance has been possible because the Fed's credibility is high. The markets believe that the Fed will reverse course when necessary to prevent inflation from rising."

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