Although average hourly earnings rose more quickly in October―pushing the year-over-year pace up to 2.5 percent – this indicator can be volatile on a month-to-month basis, and it has not been borne out by some other important measures of labor compensation. For example, over the past year, the Employment Cost Index for private sector worker compensation has risen 1.9 percent, remaining within the narrow range of recent years. This is important because my assessment of what constitutes maximum sustainable or full employment depends in large part on how a tighter labor market translates into compensation gains. At the same time, one needs to be cautious about interpreting compensation trends in the current environment. It is possible that factors such as very low headline inflation and weak productivity growth are holding down what workers receive in  2  BIS central bankers’ speeches  compensation. Therefore, because of such factors, compensation growth may not provide a reliable signal about whether we are approaching full employment. To sum up on the growth side, the economy looks to be in decent shape and is likely to continue to grow at a slightly above-trend pace. Spare labor resources are shrinking. But there still is some risk that the growth pace could slow as the trade sector acts as a drag on aggregate economic activity. On the inflation side of the ledger, I have greater concerns because we continue to fall substantially short of our inflation objective of 2 percent for the personal consumption expenditures (PCE) deflator.
On balance, I believe we have been making progress toward our goals, recognizing that a few issues still cloud the outlook. Most noteworthy is the fact that inflation continues to run well below our 2 percent objective. With respect to the economic growth outlook, the softness in third-quarter real GDP – which according to its initial estimate rose at only a 1.5 percent annualized pace – and the weakness of the manufacturing sector have raised concerns that the U.S. economy may be losing some forward momentum. Sharp reductions in oil and gas drilling activity and a loss of international competitiveness associated with the dollar’s appreciation over the past year have restrained factory output. Judging from historical experience, the impact of the dollar’s recent strength has the potential to be protracted, so that the trade sector probably will continue to be a drag on growth in 2016. Thus, the manufacturing sector is likely to continue to lag behind the rest of economy. But these negatives need to be set against the many positive aspects of the economic outlook. In particular, domestic demand continues to grow at a solid pace as increases in consumer spending, housing and business fixed investment all contributed to the third quarter’s 2.9 percent annualized gain in real domestic final sales. A large decline in the pace of inventory accumulation was the main reason why real GDP growth faltered in the third quarter.