Economic Letter

The recession that began in early 2001 probably has ended, as national output grew moderately during the first three quarters of 2002. Unemployment, however, remains a problem. Between late 2000 and early 2002, the national unemployment rate increased by about 2 percentage points, from 3.9% to about 6%; this represents about 2.8 million additional individuals looking for work.

Labor productivity, that is, real output per worker (or per worker hour), is a primary determinant of our long-run standard of living. More output per worker translates into higher profits, higher wages, or lower prices—or a combination of the three.

In recent months, it has not been unusual to see the value of major stock indexes, such as the S&P 500, change by as much as 3% in a single day. Unfortunately for many investors, the general direction of those changes has been downward.

Since December 2001, Argentina has suspended payments on its external debt, restricted bank deposit withdrawals, and abandoned a currency board arrangement that had pegged the peso to the U.S. dollar since 1991. Argentina faces inflation of over 70% this year and an economic contraction that rivals the U.S.’s Great Depression.

The Federal Reserve’s monetary policy goals are the maintenance of low inflation and sustainable output growth. Under current operating procedures, the Fed chooses a target for a short-term interest rate—specifically, the overnight federal funds rate, which is an overnight interbank lending rate—that is believed to be consistent with those policy goals.

Japan’s Prime Minister Koizumi came to power in April 2001, promising to deal aggressively with the problems that underlay the country’s economic and political instability. Since then, his reform efforts have met increasing resistance, the economy and financial system have yet to improve, and his public support has fallen.

In Europe and other industrialized parts of the world, electronic payment mechanisms have largely replaced checks. But in the U.S., paper checks are still very common, accounting for more than 60% of retail payments.

In recent weeks, a number of signs have appeared suggesting that the recovery of the U.S. economy from the recent recession is on a bumpy path. During the second quarter of 2002, real GDP grew at an anemic annual rate of barely over 1%, well below market expectations.