Alan Greenspan, chairman of the Federal Reserve, is given credit for bringing about the unprecedented economic expansion that the U.S. economy has experienced. He is believed to single-handedly control U.S. monetary policy and thereby the U.S. economy. The task of managing the U.S. economy depends importantly on the underlying volatility of output. Two economists, Margaret M. McConnell and Gabriel Perez Quiros, have found that volatility decreased starting with the first quarter of 1984, preceding Mr. Greenspan's first appointment to the Fed in 1987. This improvement in the behavior of the economy is a central banker's dream and changes the way that the Fed can manage the economy.

Can the Federal Reserve take credit for the improvement in the stability of the economy or has the change been the result of evolutionary changes in the private sector? The data support the latter conclusion. If the increased stability were the result of policy changes, we would expect that every sector of the economy would be affected, including sales. The data indicate, however, that the durable goods sector accounts for most of the change. Although durable goods typically comprise 20 percent of economic output, this sector is responsible for a much greater share of the fluctuations in total national income. That relationship apparently changed in the 1980s.

Under pressure from foreign competition, durable goods manufacturers changed their business practices, adopting many cost-saving techniques. They incorporated just-in-time logistics to reduce parts inventories and relied on information technology to provide up-to-date information on inventories and sales. In the pre-1980s era, inventories would accumulate to much higher levels, sometimes even after demand had slowed, and therefore adjustments to changing demand conditions were much more severe, many times requiring layoffs and plant closings. The introduction of changes not only cut manufacturing costs, it made the sector and the overall economy more resistant to supply-side shocks.

(Updated February 1, 2001)