Regional President Speech

Current Economic Conditions in the U.S. Cathy E. Minehan Federal Reserve Bank of Boston April 1999

Economic Growth in the U.S. Remains Strong. Current expansion is longest in U.S. peacetime history -- 8 years. Excluding 1990/91 recession, current expansion is over 16 years. Gross Domestic Product Percent Change, Annualized 10 ~-----------.---.----------,.---------~----------, 8 - ! Remarkable Stability 6 - 4 2 0 -2 -4 71 :01 73:01 75:01 77:01 79:01 81 :01 83:01 85:01 87:01 89:01 91 :01 93:01 95:01 97:01 98:04 Source: Bureau of Economic Analysis

Consumers and Businesses Are Driving the Growth. Personal Consumption Expenditures Residential Investment Percent Change, Annualized Percent Change, Annualized 7 70 60 6 50 5 40 4 30 3 20 10 2 0 1 -10 0 -20 -1 -30 -2 -40 78:01 82:01 86:01 90:01 94:01 98:01 78:01 82:01 86:01 90:01 94:01 98:01 80:01 84:01 88:01 92:01 96:01 98:Q4 80:01 84:01 88:01 92:01 96:01 98:Q4 Source: Bureau of Economic Analysis

Households' Wealth and Savings Percent 20 Savings Rate With Capital Gains 15 Adjustment 10 5 Savings Rate 0 -5 9a:a4 60:Q1 64:Q1 68:Q1 72:Q1 76:Q1 80:Q1 84:Q1 88:Q1 92:Q1 96:Q1 62:Q1 66:Q1 70:Q1 74:Q1 78:Q1 82:Q1 86:Q1 90:Q1 94:Q1 98:Q1 Source: Bureau of Economic Analysis, Flow of Funds, and Staff Calculations

Business investment is strong, especially in high technology. Business Spending on Computers Percent Change, Year-over-Year 80 70 60 Real 50 40 30 20 10 $95.1 Billion 0 Nominal -10 -20 -30 1990:01 1991:01 1992:01 1993:01 1994:01 1995:01 1996:01 1997:01 1998:01 1998:04 Source: Bureau of Economic Analysis

Employment Is Strong. Employment grew 2.6 percent in 1998 and 2.4 percent over the past 3 years, while the labor force grew only 1.0 percent in 1998. Payroll Employment and the Civilian Labor Force Percent Change, Year-over-Year 6 5 Nonfarm Payroll Employment 4 3 2 1 0 -1 Civilian Labor Force -2 -3 60:Q1 64:Q1 68:Q1 72:Q1 76:Q1 80:Q1 84:Q1 88:Q1 92:Q1 96:Q1 99Q1 62:Q1 66:Q1 70:Q1 74:Q1 78:Q1 82:Q1 86:Q1 90:Q1 94:Q1 98:Q1 Source: Bureau of Labor Statistics

Labor Markets Are Tight. Although there has been a rise in labor participation, the unemployment rate is at its lowest level in nearly 3 decades. Percent 68 -..--------,-----,-------~-=----------------~ 67 66 65 64 63 62 Labor Force 61 Participation Rate 60 59 70:01 72:03 75:01 77:03 80:01 82:03 85:01 87:03 90:01 92:03 95:01 97:03 99:01 Percent 12 ~------,c-----,-----------------~-------~ 11 10 9 Unemployment Rate 8 7 6 5 4 3 70:01 72:03 75:01 77:03 80:01 82:03 85:01 87:03 90:01 92:03 95:01 97:03 99:01 Thousands of Workers 600 r-------------------------~ 550 500 450 Discouraged Workers 400 350 300 250 L___ __ 94:01 95:01 96:01 97:01 98:01 99:01 94:03 95:03 96:03 97:03 98:03 Source: Bureau of Labor Statistics

Tight Labor Markets Have Produced Rising Wages. Employment Cost Index and Average Hourly Earnings Percent Change, Year-over-Year 7 6 5 Average Hourly Earnings 4 3 2 Employment Cost Index 1 83:01 85:01 87:01 89:01 91 :01 93:01 95:01 97:01 99:01 84:01 86:01 88:01 90:01 92:01 94:01 96:01 98:01 Source: Bureau of Labor Statistics

Inflation Remains Low. Total inflation rose 1.6 percent in 1998. Core inflation rose 2.3 percent in 1998. Consumer Price Index Percent Change, Year-over-Year 20 15 Total 10 Excluding Food & Energy 5 0 1 60:01 64:01 68:01 72:01 76:01 80:01 84:01 88:01 92:01 96:01 99:0 62:01 66:01 70:01 74:01 78:01 82:01 86:01 90:01 94:01 98:01 Source: Bureau of Labor Statistics

Why? Commodity prices, especially oil, have been falling. Rising productivity has stabilized labor costs, even though wages are increasing. Oil Prices Productivity Percent Change, Year-over-Year Dollar Price Per Barrel 45 6 5 40 4 4Q/4Q -- 2.7 35 3 30 2 April's Average (through 4/22) 1 - 25 0 20 • -1 15 -2 10 L-------------------' -3 78:Q1 82:Q1 86:Q1 90:Q1 94:Q1 98:Q1 78:Q1 82:Q1 86:Q1 90:Q1 94:Q1 98:Q1 80:Q1 84:Q1 88:Q1 92:Q1 96:Q1 99:Q1 80:Q1 84:Q1 88:Q1 92:Q1 96:Q1 98:Q4 Source: Wall Street Journal Source: Bureau of Labor Statistics

Financial Markets Are Exuberant. The U.S. stock market has risen 100% over the past 5 Years. Credit spreads have narrowed since the fall. Stock Market Fixed Income Spreads Thousands of Points Percent 14 7 12 6 Corporate Bonds vs. 10 Year Treasury Wilshire 5000 10 5 8 4 Merrill Lynch Low Grade Dow Jones 6 30 Industrial Stocks 3 4 2 2 1 Moody's Aaa 0 0 78:01 83:01 88:01 93:01 98:01 01-May-98 28-Jul-98 22-Oct-98 21-Jan-99 80:03 85:03 90:03 95:03 99:01 15-Jun-98 09-Sep-98 04-Dec-98 05-Mar-99 Source: Wall Street Journal Source: FRB Statistical Release H.15, Merrill Lynch

Government Demands on Credit Markets are Down. Federal and state budgets are in surplus. Nominal interest rates are low. Federal Surplus or Deficit 10 Year Treasury Bond Billions of Dollars Percent 100 -~~~----------- 16 14 12 -100 10 8 -200 6 4 1978 1982 1986 1990 1994 1998 78:01 82:01 86:01 90:01 94:01 98:01 1980 1984 1988 1992 1996 80:01 84:01 88:01 92:01 96:01 99:01 Source: U.S. Department of Treasury Source: FRB Statistical Release G.13

The External Deficit Looms as a Potential Problem. Trade deficit hit new high in 1998 -- $169.3 billion. Deficit is political as well as economic issue. Foreign Trade Billions of Dollars 300 Imports • 250 Exports 200 10 Estimate With Jan. and Feb. Actuals 150 100 92:Q1 93:Q1 94:Q1 95:Q1 96:Q1 97:Q1 98:Q1 99:Q1 92:Q3 93:Q3 94:Q3 95:Q3 96:Q3 97:Q3 98:Q3 Source: Bureau of the Census

Worsening Trade Deficit Has Multiple Causes. U.S. dollar remains strong. Foreign GDP growth is weak. U.S. propensity to consume remains strong. Value of U.S. Dollar Foreign GDP Growth May, 1973=100 Percent, Annualized 105 5~--------------- Nominal Trade-Weighted Exchange 100 Value of US Dollar vs. Major Currencies 4 95 3 90 2 85 1 80 Trade-Weighted Foreign GDP Growth 75 0 94:Q1 96:Q1 98:Q1 96:Q3 97:Q1 97:Q3 98:Q1 98:Q3 95:Q1 97:Q1 99:Q1 96:Q4 97:Q2 97:Q4 98:02 98:Q4 Source: FRB Source: Staff Calculations

1999 Forecast Some slowing, perhaps to trend, reflecting -- slower consumer spending and residential investment -- reductions in business spending as profit margins are squeezed -- a continuing drag from trade Continued tight labor markets Some uptick in inflation Other possibilities: On the downside: Could things slow down too much? On the upside: Will resource constraints hit before growth slows, driving up inflation? Even better: Will continued productivity growth help to further blunt inflation forces?