Remarks by Janet Yellen Chair of the Council of Economic Advisors

The Briefing Room

1:53 P.M. EST

MR. TOIV: Good afternoon, everybody.

Q: Everybody? It's just me.

MR. TOIV: Excuse me. Good afternoon to everybody who is here. Good afternoon to everybody who is here for an event that we have come to look forward to every year, given the extraordinary news that we have had to report every year on the economy.

Today is the day that the President has sent his annual Economic Report of the President to the Congress, as mandated by law. And that report is prepared by the Council of Economic Advisors, which is chaired by Dr. Janet Yellen. The other two members of the council are also here, Jeff Frankel and Rebecca Blank. And Dr. Yellen will speak, and then all three of them will be available to take your questions.

DR. YELLEN: Thank you. Well, as Barry mentioned, today we released the 1999 Economic Report of the President. Each year, one of the most closely watched aspects of the report's release is the color of the cover. (Laughter.) And, as you know, this is not a budget document, which of course was black this year to symbolize our nation's budget surpluses.

No, instead, this document is a report on the state of the economy, and this year our economy is red-hot. So that is why we chose a red cover -- red to symbolize our nation's red-hot economy.

Q: Some like it hot.

DR. YELLEN: We like it hot. In any case, as you know, the President is required to submit to Congress each year a report that describes the state of the U.S. economy. The report also traditionally presents a broad range of analyses of current economic policy issues. This year, in addition to the discussion of the state of the U.S. economy, the report looks at a number of issues -- the aging of the American population, regulation and innovation, and recent international financial turmoil.

But one of the most important highlights of this year's report is a discussion of the direct and measurable benefits to American workers that are accruing from our strong and healthy economy. And because this section includes some new work done by the Council of Economic Advisors on recent wage growth, I'd like to focus your attention on that aspect of the report.

But first, let me make a few comments about the state of the economy. Our nation's economy is the strongest it's been in a generation. In 1998, growth was strong and job creation was vigorous while inflation declined. Real gross domestic product grew 3.9 percent, non-agricultural jobs rose by about 2.9 million during the year and the average unemployment rate for the year dropped to 4.5 percent, which is its lowest level since 1969.

The Consumer Price Index rose by only 1.6 percent, its smallest increase since 1964, and other measures of inflation were even more muted. And as you all know, this year, the federal budget moved strongly into surplus, and those surpluses are projected well into the future.

The continuing strong economic performance in 1998 is all the more remarkable because it took place at a time of considerable stress to the world economy. The international environment remains exceptionally risky. But the U.S. economy has entered 1999 on course to continue growing. So the chances are good that next year at this time, we will be on the verge of marking the longest economic expansion ever.

Because of our nation's strong and healthy economy, Americans workers are enjoying direct benefits. As I said earlier, for this year's report, the Council of Economic Advisors conducted an analysis of recent wage growth, and we found that wage growth has been particularly strong for historically disadvantaged groups.

After years of decline, the real wages of black men began to increase in 1993, and have risen by 5.8 percent in the last two years. Black women and Hispanic men and women have also experienced recent gains.

Our tight labor market also appears to be helping even young minority workers, who suffered greater wage declines than others during the 1980s. In 1998 alone, the real wages of young black men aged 16 to 24 rose by 6.2 percent.

Less-skilled men, who have experienced a long-term wage decline since the late 1970s, also are experiencing impressive gains. In 1998, real wages among men age 20 and over who are high school dropouts rose by 7 percent. This was the first time since at least 1979 that their wages rose. In addition, real hourly wages for men at the 10th and 20th deciles of the earnings distribution rose about 6 percent since 1993.

Immigrants are also earning more. Mexican and Central American-born immigrants, who account for about 30 percent of new immigrants since 1980, have had real wage growth since 1995 of almost 7 percent for men, and almost 4 percent for women. These are truly impressive gains for historically disadvantaged groups.

There are a number of other issues I could discuss, but let me stop there and just conclude by saying that over the past year, the performance of the U.S. economy has been excellent. We've had solid growth, strong job creation, low unemployment, low and stable inflation. We've had broad and lasting benefits for American workers as a result of the strong economy, particularly for disadvantaged groups, who have seen impressive real wage gains.

There are still long-term challenges facing our nation as we enter the 21st century, and President Clinton has proposed a broad agenda for helping to equip the American people with the skills and security they need to take advantage of opportunities and possibilities in this new economic era.

Q: Can you tell us in ordinary language what the 10th and 20th deciles are, from the standpoint of men and the increase in their wages?

DR. YELLEN: The bottom 10 and 20 percent points in the distribution of wages, namely, men in the lower 20 percentile of the wage distribution, the lowest earning men.

Q: Can you give us an earning figure? What is that, roughly? Whatever it is?

MS. BLANK: I have to get back to you.

Q: Well, the economy is good; how long does it stay good?

DR. YELLEN: There's every -- although the environment clearly contains risks, particularly due to the international situation --

Q: Brazil, Asia?

DR. YELLEN: Yes. There's no reason to believe that the United States is not well poised to continue growing. The year has started off on a very strong note. Inflation is extremely low. One of the things that we do in the report this year is to compare the current expansion to the two other long expansions of the postwar period, that of the '60s and the '80s. And, interestingly, at this point, the point we're at now in those expansions -- although the '80s never made it quite to this point -- but at comparable points, inflation was rising -- substantially so, both in the 1960s and the 1980s expansion.

At this point in the 1960s, inflation had hit five percent; comparable inflation increases occurred in the '80s. What typically has ended postwar American expansions is the need to contain inflation and a tightening of monetary policy to control inflation. So when you see that we've reached a point where inflation is substantially lower than in either of those long expansions and has been declining, that's, on its own, an excellent sign because it means that we have not hit against capacity constraints, and there is not going to be the need to curtail building inflationary forces.

Beyond that, the kinds of things that typically bring an expansion to and end or signs of an end of an expansion would be evident financial imbalances, burdening households or firms or, alternatively, a clear overhang of inventories that might signal a need for firms to cut back production.

None of those signs are present in the U.S. today. And although the external environment has been a drag on the U.S. economy, domestic demand is offsetting it and is propelling the economy forward. So do I feel positive that the economic expansion will continue for another year or more? No, because there are always risks. But there is no predictable reason why we can't continue to grow.

Q: George Soros, and Barton Biggs of Morgan Stanley, have both said that U.S. stock market, in particular, and -- in the Western world are overvalued, we're in a bubble. What's your view of that?

DR. YELLEN: Well, I don't want to comment on the appropriate level of stock prices; that's not for me to second-guess. I would say that the strong stock market has been one of the forces propelling this expansion, in the sense that a strong stock market has fed through into unusually strong growth in consumer spending -- about 5 percent over the last year.

And if stock prices were to grow less quickly in the future, or to level off, one would expect some moderation in the growth of consumption spending. But almost all private forecasters are assuming, and the administration also is assuming, continued growth but a slowdown to a more trend-like pace. And that could be part of a scenario that simply brings growth down in line with the trend.

Q: One of the points that you made in the report was that you were counting on Japan to actually help bring Asia out of its recession. Do you have specific steps you'd like to see Japan take that the administration would find encouraging?

DR. YELLEN: Well, we have urged Japan to do essentially three things: to take strong measures on the fiscal side to stimulate their economy, because their short-term interest rates are so low that -- although there may be some scope for monetary policy to make a contribution, that contribution has become limited, and we believe that a strongly expansionary fiscal policy is necessary to get the Japanese economy going.

Second, clearly Japan is -- the banking sector, the financial sector more broadly, has problems. There are symptoms of credit crunch curtailing economic growth in Japan, and recovery, and we have urged Japan for a very long time to take forceful action to deal with those problems.

Third, we have urged Japan to deregulate and to open markets. And we're encouraged with the legislation that's been put forward that promises a substantial amount of money to address the problems of the banking sector. There is -- in November, Prime Minister Obuchi proposed a fiscal package. We are eager to see whatever it takes implemented quickly and effectively to deal with the problems, and we do think that's important for Asian recovery.

Q: When do you think the Japanese economy will turn around?

DR. YELLEN: I don't have a forecast on that. What we believe is that it's necessary for the Japanese government to take whatever steps are necessary to stimulate its economy. There have been significant steps; the situation has also, over the last year, been a deteriorating one where packages that might initially, early on, have been appropriate, the problems have mounted. And so we simply want to see Japan take decisive and effective action to stimulate economic growth.

Q: If the Japanese economy will continue to register negative growth as many economic forecasters -- economies are forecasting, how much drag will it have on the rest of Asia? Is it possible for the other Asian countries, other Asian economies to grow strongly?

DR. YELLEN: I don't have a quantitative estimate to give you of that, but clearly because Japan is the world's second-largest economy and the most important economy in the Asian region as a major customer of the products of the crisis-stricken countries, Japanese growth is needed to stimulate those economies and enable them to export more, which they really have to do, given the curtailment in capital flows to those countries.

So if those countries find it difficult to expand their exports, their own contractions will simply end up being worse. And that's why we believe it's so critical that Japan, as well as other industrial countries, have to take steps to expand.

Okay, thank you.

THE PRESS: Thank you.

END 2:05 P.M. EST