Testimony of Chairman Alan Greenspan

General questions in regard to article.

Starting from the paragraph that begins; "When aggregate demand accelerated in the second half of 2003," please address the following questions.

1) How does he explain the current lag of employment to an acceleration in economic activity?
2) How did he characterize the impact of productivity on pre-tax profits and what was the impact on hourly wages?
3) What is the consequence of the above statement and what is his outlook.
4) Is he sanguine about inflation?
5) What has he said about future interest rates?

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Testimony of Chairman Alan Greenspan
The economic outlook
Before the Joint Economic Committee, U.S. Senate
April 21, 2004
When aggregate demand accelerated in the second half of 2003, the pace of job cuts slowed. But because of the newfound improvements in the efficiency of their operations, firms were able to meet increasing demand without adding many new workers.
As the opportunities to enhance efficiency from the capital investments of the late 1990s inevitably become scarcer, productivity growth will doubtless slow from its recent phenomenal pace. And, if demand continues to firm, companies will ultimately find that they have no choice but to increase their workforces if they are to address growing backlogs of orders. In such an environment, the pace of hiring should pick up on a more sustained basis, bringing with it larger persistent increases in net employment than those prevailing until recently.
Still, the anxiety that many in our workforce feel will not subside quickly. In March of this year, about 85,000 jobless individuals per week exhausted their unemployment insurance benefits--more than double the 35,000 per week in September 2000. Moreover, the average duration of unemployment increased from twelve weeks in September 2000 to twenty weeks in March of this year. These developments have led to a notable rise in insecurity among workers.
Most of the recent increases in productivity have been reflected in a sharp rise in the pretax profits of nonfinancial corporations from a very low 7 percent share of that sector's gross value added in the third quarter of 2001 to a high 12 percent share in the fourth quarter of last year. The increase in real hourly compensation was quite modest over that period. The consequence was a marked fall in the ratio of employee compensation to gross nonfinancial corporate income to a very low level by the standards of the past three decades.
If history is any guide, competitive pressures, at some point, will shift in favor of real hourly compensation at the expense of corporate profits. That shift, coupled with further gains in employment, should cause labor's share of income to begin to rise toward historical norms.
Such a process need not add to inflation pressures. Although labor costs, which compose nearly two-thirds of consolidated costs, no longer seem to be falling at the pace that prevailed in the second half of last year, those costs have yet to post a decisive upturn. And even if they do, the current high level of profit margins suggests that firms may come under competitive pressure to absorb some acceleration of labor costs. Should such an acceleration of costs persist, however, higher price inflation would inevitably follow.
The pace of economic expansion here and abroad is evidently contributing to some price pressures at earlier stages of the production process and in energy markets, and the decline in the dollar's exchange rate has fostered a modest firming of core import prices. More broadly, however, although the recent data suggest that the worrisome trend of disinflation presumably has come to an end, still-significant productivity growth and a sizable margin of underutilized resources, to date, have checked any sustained acceleration of the general price level and should continue to do so for a time. Moreover, the initial effect of a slowing of productivity growth is more likely to be an easing of profit margins than an acceleration of prices.
As I have noted previously, the federal funds rate must rise at some point to prevent pressures on price inflation from eventually emerging. As yet, the protracted period of monetary accommodation has not fostered an environment in which broad-based inflation pressures appear to be building. But the Federal Reserve recognizes that sustained prosperity requires the maintenance of price stability and will act, as necessary, to ensure that outcome.
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2004 Testimony
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