The Economic Outlook

It is a pleasure to speak on the economic outlook this morning, in part due to this distinguished Ohio Valley audience, and in part because the outlook is so encouraging. Growth is proceeding on a solid pace this year, and inflation is low and stable. Moreover, our economy has withstood several substantial shocks over the last several years, and yet has remained on course. So, I think we have abundant reason to be grateful for a quite positive economic outlook. Before I begin reviewing that outlook, however, I would like to note, as usual, that the views expressed are my own and are not necessarily those of my colleagues in the Federal Reserve System. It has now become uncontroversial to say that the outlook for overall economic activity is quite healthy. But six months ago, you may recall that many pundits were decidedly less optimistic. In the wake of the destruction caused by two hurricanes, energy prices had surged. From the end of 2004 to the peak last fall, crude oil prices rose 56 percent, wholesale natural gas prices rose 129 percent, and retail gasoline prices rose 70 percent. To some, it seemed obvious that the high energy prices would lead to a significant and persistent reduction in consumer spending, which would bring overall economic activity to the edge of recession. That didn’t happen. It is true that the growth rate of real GDP in the fourth quarter fell by about 2 percentage points from its trend over the previous two years, but a closer look reveals that transitory factors played a large role there. Other data have remained robust, and the consensus forecast is now that real growth in the first half of this year will be at about a 4 percent rate.