As always, it is a pleasure to welcome Commissioner Abraham before the Joint Economic Committee.
Once again, Commissioner Abraham brings good news. According to the household survey, 209,000 jobs were added in April, and the unemployment rate fell to 4.9 percent. Employment growth as measured by the payroll survey was softer than expected, posting an increase of 142,000 jobs. This business cycle expansion continues to produce output and employment gains with no evidence of a significant slowdown in the near future. Unfortunately, the recent release of data on middle class earnings continue to show stagnation through the first quarter of 1997.
As I pointed out last week, another benefit of this sustained expansion has been the marked improvement in the budget situation. The strong economy has produced strong revenue growth, and this is pushing the projected 1997 deficit down far below official projections. It now appears possible that the 1997 deficit may even fall below $70 billion.
The sustained business cycle upswing has brought a solid economic situation with strong output and employment growth, and a rapidly improving near term budget outlook. Moreover, the low inflation climate produced by the Federal Reserve's disinflation policy demonstrates that price stability is an important foundation for sustained economic growth. The experience over the last two decades shows that low inflation leads to job growth and low unemployment, just as the late 1970s proved that high and accelerating inflation can lead to high unemployment.
The strong employment and economic growth in the last two quarters is a very positive development. Moreover, there is no real evidence of accelerating inflation in price index measures, commodity prices, or the value of the dollar. While the Federal Reserve has done a very good job keeping inflation low, I have voiced concerns in recent months that it may be tending to view the current economic strength as potentially inflationary.
Though there is agreement that price stability should be the ultimate objective, our research here at the JEC suggests that price stability should be implemented using inflation targets based on broad price indexes. In the absence of inflation shown in these indexes or forward looking inflation measures, I do not believe that strong economic growth is itself inflationary, or is a justification for increases in interest rates by the Federal Reserve. The tame data on the employment cost index and average hourly earnings released by BLS this week lend further support to this view.
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