Will The Economy Grow Faster Than Expected?

Over the remainder of the two-year forecast horizon, the economy was expected to grow generally along its estimated potential. Consumer spending was anticipated to keep pace with the growth of disposable income; concerns about job security remained and consumer debt burdens had risen further, but the still-ample availability of credit and the substantial rise in the value of household equity holdings would support further increases in consumption. The further decline in mortgage rates recently from already-favorable levels would help to sustain homebuilding activity at a relatively high level.

With sales and profits projected to grow more slowly, and with utilization of existing capacity having eased considerably, business investment in new equipment and structures was expected to expand at a more moderate rate. In light of the recent strengthening of the dollar, the external sector was expected to exert a small restraining influence on real activity over the projection period as a whole. Much uncertainty still surrounded the fiscal outlook, but the recent impasse in the budget negotiations between the Administration and the Congress suggested a lower degree of fiscal restraint over coming years than had been assumed in the previous forecast. Given the projected outlook, rates of utilization of labor and capital resources and of inflation were not expected to change materially.

In the Committee's discussion of current and prospective economic activity, members noted a number of temporary factors that were retarding the expansion. The weakness in business activity this winter was to some extent the result of the partial shutdown of the federal government and the severe storms in a number of regions; both clearly were transitory influences on the economy.

Growth of economic activity also was being constrained by production cutbacks stemming from efforts to bring stocks into better alignment with disappointing sales in a number of industries. Even so, in the absence of major overhangs in inventories of business equipment and consumer durables, and given favorable conditions in financial markets, members believed that a resumption of moderate, sustainable growth after a relatively brief period of weakness was the most likely outlook for the economy. At the same time, many observed that the risks to such an outcome did not seem balanced.

A number of concerns, including the extent of the damping effects of high debt loads and employment uncertainty on consumption and questions about the sources of further export growth, suggested the possibility of sluggish expansion, while possible developments on the upside were more difficult to identify. With resource use unlikely to vary appreciably, the members generally expected no significant change in the underlying inflation picture over the year ahead. The recent performance of inflation had some encouraging aspects, and the odds on greater price pressures seemed relatively small at this time.