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Signs of Recovery
Subject Economic Growth
Topic Productivity and Growth
Key Words Consumer Prices, Industrial Activity, Non-inflationary Economic Growth, Inflation, and Interest Rates
News Story

The Labor Department's consumer price index rose by 0.2 percent in June, following a decrease of 0.3 percent in April. Overall industrial activity, which includes factories, mines and utilities increased by 0.1 percent in June for the second straight month. This good news, of increased industrial activity with only modest price increase is a welcome finding for the private sector as well as the Federal Reserve.

To the Fed, it means that industrial production appears to have stabilized and the worries of deflation may be behind us. Alan Greenspan, however, still warns, "It (deflation) will continue to engage our attention until it is very clear that it can be fully taken off the table." Economist Stephen Cecchetti says, the report "…really does validate the Fed's view that it can keep interest rates low for some time without worrying too much about inflation." This, of course, is exactly what the economy needs to sustain a period of strong economic growth.

The combined finding of increased production and moderate price increases signals the industrial community to increase production and put the fear of recession behind them. Many private economists and the Federal Reserve as well, are hoping that these signals will aid the economy in picking up momentum in the second half of the year. Companies who have been unsure of consumer demand are likely to increase production and hire more labor in anticipation of expected profits from a growing economy.


(Updated August 27, 2003)

Questions
1.

Why is Greenspan keeping the possibility of deflation on the table?

2. Why are higher prices a welcome signal to producers?
3. Given the information reported above, what do you think the Fed will do with interest rates when they meet again?
Source Associated Press, "A Pair of Hopeful Signs For the Economy's Recovery," Kansas City. COM, July 17, 2003.

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