For example, the cost of capital remains low and cash flows are high. Third, there is plenty of room for further gains in residential investment. Housing starts have been running at an annual pace of only about one million so far this year. This is low relative to both the rate of household formation that one would expect given underlying demographics and the rate of job formation. Moreover, continued improvement in mortgage  1  2  Jonathan McCarthy, Richard Peach, Paolo Pesenti and Joseph Tracy assisted in preparing these remarks. BIS central bankers’ speeches  credit availability should support the demand for new housing. Household credit worthiness is improving as the scars of the financial crisis heal, and underwriting standards may be relaxed somewhat in response to the excellent performance of recent mortgage vintages. Fourth, household finances generally are in good shape with debt service burdens at historically low levels. Nonetheless, household borrowing has been rising only very slowly, and the personal saving rate is somewhat elevated relative to what one would expect given the level of household net worth relative to income. This suggests that if households become more confident about their finances, consumer spending should grow at least as fast as income growth over the remainder of the year. But, I can’t be completely confident about this forecast. After all, several times during this expansion we have been fooled by sharp rises in the growth rate that appeared to presage a sustained pickup, but that subsequently proved fleeting.
Moreover, faster consumption growth is not a given. It will depend, in part, on the pace of employment and wage growth. A downside risk is that wage growth remains subdued, which would undercut consumer spending. And, the trade sector looks likely to remain a drag on growth over the remainder of the year. Although the dollar has depreciated slightly on a broad trade-weighted basis recently, it still is more than 10 percent higher than it was a year ago. Despite the sharp slowdown in growth evident during the first half of the year, we have seen continued job gains and further falls in unemployment so far this year. Consequently, we still seem to be making progress toward our objective of maximum employment in a context of price stability. Today’s payroll and household employment reports indicate that this progress continued into May. Even with a weak month in March, job gains this year have been averaging almost 220,000 per month. The gain in May was even stronger at 280,000 and was widespread across industries. Although the 12-month change in average hourly earnings is still low at 2.3 percent, it is a bit higher than we have seen in recent years. At the same time, there is still some ways to go. The unemployment rate has changed little in the past four months at about 5½ percent, with the levels of part-time workers for economic reasons, and longduration unemployed, remaining elevated.