For release: Feb. 20, 2004

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St. Louis Fed’s Poole: GDP Growth, Low Inflation, Job Growth Make 2004 "Quite Promising"

Link to speech.

St. Louis, MO — The economic scenario for 2004 looks quite promising: Continued strong GDP growth, a core inflation rate remaining around 1 per cent, and sustained increases in payroll employment that are substantially stronger than those seen in recent months.

That’s the view of William Poole, president of the Federal Reserve Bank of St. Louis. Poole’s remarks were part of a speech to the AAIM Management Association. “If these results come to pass, I think we could all agree that 2004 was truly a banner year,” Poole said.

In reviewing the 2003 U.S. economy, Poole said it was an “exceptional year” in many respects. “Compared with 2002, economic growth was stronger, inflation fell slightly, corporate profits rose sharply and, in response, the stock market rallied convincingly.” He added that nominal interest rates declined modestly, the trade-weighted value of the dollar fell markedly, and the growth rate of labor productivity rose for the third straight year, registering its quickest pace since 1965.

Poole said that if confronted by those results at the beginning of 2003, “I would have expected a fairly brisk upswing in private-sector employment. That was not the case, as the labor market continued to confound forecasters and most economists.” He said that strong productivity growth over the past couple of years played an important role in keeping job growth rates from increasing more than they have. “The Blue Chip Consensus projected that annualized growth in output per hour in the nonfarm business sector would average 2 percent in 2003. Instead, labor productivity averaged a little more than 5 percent.”

This productivity growth, said Poole, not only kept real after-tax income growth at elevated rates, which helped consumers spend more, it also helped keep aggregate price pressures at bay. “As core inflation rates drifted lower in 2003 compared to 2002, nominal interest rates did also. Besides the obvious benefits to the housing sector and producers of big-ticket items like motor vehicles or appliances, households and businesses benefited from a lower interest rate environment by refinancing debt.”

Looking ahead to 2004, Poole said that “Based on past experience, it seems rather inconceivable that labor productivity growth can continue to outstrip the growth of real GDP indefinitely, particularly when population growth remains around 1 percent. To believe otherwise implies further declines in the employment-to-population ratio. Instead, I would expect to see a larger share of the population becoming employed this year - a development that usual occurs when real GDP is growing at a healthy clip.”

Concerning inflation, Poole said “Probably the most important domestic economic development I’ve witnessed has been the achievement of price stability—or at least something pretty close to it. Today’s low and stable inflation rates are far removed from those of the late 1960s to the early 1980s—a period economic textbooks call The Great Inflation. As a policymaker, I believe this has greatly burnished the Fed’s credibility with the markets and the public. And it has afforded us considerable flexibility in setting our interest rate target during times of uncertainty.”

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