In early February the Federal Reserve decided not to raise short‑term interest rates. The nation's central bank determined that economic growth was not contributing to a marked acceleration in the inflation rate. Even though the economy grew at a robust 4.7 annual rate during the last three months of 1996, inflation appears to be under control. For example, the GDP deflator, a broad measure of inflation, grew by only 1.8 percent during the period. 

     Many analysts are concerned that there will be increased pressure on wage levels because of the economic growth in the year ahead. Unemployment data suggest that labor markets everywhere are becoming increasingly tight after so many years of economic growth. Very low unemployment rates are evidence of this situation. Further, the Labor Department's employment cost index rose by 3.1 percent this year compared to the 2.6 rate of 1995. For many years workers have in effect traded higher wages and benefits for job security. Workers are now realizing that with an ever tighter labor market the probability of losing one's job because of higher pay is becoming more remote. 

     However, the general consensus among economists is that inflation will expand by just 2.9 percent in 1997. Thus, the Federal Reserve may be right about inflation and wages and therefore be able to hold off a tightening of credit markets. Economists also see real GDP expanding more slowly in 1997 than 1996, about 2.0 to 2.5 percent for the year depending on whose forecast you believe. This notion of slower growth is reinforced by a recent small increase in the index of leading economic indicators. Also, the help wanted advertising index for the nation was lower in December than in previous months indicating perhaps a period of slower growth. Thus, concerns over wage pressure may be overstated. 

     Further, the Conference Board reported that consumer confidence is at a 7 1/2year high. This means that people are feeling relatively secure about their jobs, income, and economic situation in general. As a matter of fad the report indicated that 30 percent of those people polled, a seven‑year high, said that jobs were plentiful. 

     The greatest unknown in the economy at the present time is the stock market. Many financial analysts are worried that the high value of the market is not sustainable. In other words the prices being paid for future earnings greatly exceed historic norms. They also believe that if the stock market would have a major correction, consumer confidence could be easily shaken because a large number of new investors have never had to deal with a major downturn. This could then cause the economy to stall because people will see their wealth erode and as a result curtail their buying of goods and services. However, others who study the market see this high valuation as sustainable because of the huge influx of money into retirement accounts, low interest rates, and a benign inflationary environment. Only time will tell if this or the doomsday scenario is a more accurate assessment of the situation.