The economy is operating far below its productive potential – leaving the level of output, income and employment much lower than they would be if the economy’s unused  BIS central bankers’ speeches  3  resources were put to work. One summary statistic says it all – the unemployment rate is unacceptably high at 9 percent. Given my outlook, the decline of unemployment over the next year is likely to be modest. Furthermore, we also continue to face significant downside risks, mostly related to the stress in the eurozone. In a speech yesterday at West Point, I highlighted the need for our nation to deploy a full set of economic policy tools to secure the recovery and build for the long term. This includes monetary policy, but also requires policies to help repair housing markets, fiscal policy that supports growth in the short and long run, and structural reforms that increase competitiveness and support a shift in the pattern of economic activity toward a more sustainable growth path than that which prevailed during the last business cycle upswing. Regional economic conditions How is the recovery proceeding in the state and the region? As I mentioned, the New York Fed produces economic activity indexes to help monitor conditions in New York State.1 Based on our index, the downturn in the state’s economy ended in November of 2009. Since then, I would describe the state’s economy as recovering at a moderate pace, although there appears to have been a pause in September.
Although the latest news on the U.S. economy is somewhat more encouraging than that from earlier in the year, we should not take much solace from that. After a very weak first half, when GDP growth was less than 1 percent, economic activity has strengthened somewhat and inflation pressures are starting to ease. Growth in the third quarter is currently estimated to be 2.5 percent, and recent indicators suggest growth in the fourth quarter could be somewhat higher. This modest rebound reflects in part the passing of transitory factors such as the damping effect on household and business spending power from rises in energy and food prices as well as the supply disruptions related to the earthquake and tsunami in Japan. However, as we look toward 2012, the U.S. economy continues to face several obstacles to a robust recovery. Accordingly I expect growth of about 2.75 percent for 2012. Consumer price inflation has begun to moderate. This moderation is just starting to become evident on a 12-month time horizon – in which consumer price inflation as measured by the consumer price index (CPI) is rising at about a 3.5 percent annual rate. Given current expectations for the path of energy prices – taken from futures markets – consumer price inflation on a year-over-year basis should continue to fall over the next few months. We cannot be satisfied with the current state of the economy or the outlook for the next few years.