Asked about Friday’s dramatic upward revision of job creation in the year to March, Mr Poole said his immediate response was to think it would “tend to reduce a little bit estimates for potential GDP growth”.

Many economists believe the potential growth rate for the U.S. economy is around 3% to 3 1/4%.

[S]ince World War II, real growth has fluctuated around a 3½ percent average, and forecasts of future growth tend to be centered on that number or perhaps somewhat lower because labor force growth is slowing as baby boomers retire.

As for 2007, the central tendency of the FOMC members’ GDP forecasts is 3 to 3½ percent. This growth outlook should be consistent with keeping the economy close to full employment, based on the CBO forecast of potential GDP growth of 3.24 percent in 2007.

Yet, as near as we in Boston can tell, the best baseline forecast is that U.S. growth will moderate from its average of around 4 percent in the first half of 2006 to something slightly below its potential of a bit less than 3 percent over the next year or so.

Globally, growth is solid as well. U.S. exports have increased and trade is at least for now marginally supportive of growth. 

To summarize — I see growth for the next year or so in the high 2’s, approximately full employment, and core inflation subsiding.  Not a bad picture, particularly given the challenges I mentioned a moment ago.

The next obvious question concerns risks — where are they and how likely are they to materialize?  In my view, risks have grown over the summer on both sides of this forecast.  Growth could be slower or inflation could be higher and more persistent -- or both.  I take both of these risks seriously.

By 2030, almost one in five U.S. residents will be 65 years or older.  Well before then, beginning in about 2018, Social Security will start to pay out more in ben­efits than it receives from payroll taxes.  Even before that, -- in the neighborhood of 2010 -- Social Security will start exerting upward pressure on the unified federal budget deficit as its surplus diminishes, with a consequent reduction in net public saving, absent changes in the program itself, increased taxes, or reduced spending on other government programs.  

The situation for Medicare is similar and, potentially even more serious.  Payroll taxes to cover Medicare expenditures are currently in surplus.  Over time, however, Medicare spending is expected to increase more rapidly than related tax revenues, creating a deficit prob­lem that analysts see as potentially greater in size and more difficult to deal with than that associated with Social Security.   Thus, despite the relatively benign federal deficit we currently see, it is clear the situation will worsen dramatically over the next decade.  And, unlike the late '80s when deficits became a national concern, there seems to be no political consensus on the nature of this problem or its resolution -- a fact that should be a concern to all of us.

Despite these challenges, the economy grew at a solid clip, averaging just over 3¼ percent for the past two years.

This pace of growth is moderately above current estimates of the growth rate that is sustainable in the long run, and it has lasted long enough to eliminate much of the slack in labor and product markets that was apparent a year ago.

That said, I must admit that I'm also less sanguine than I was a month ago about one particular factor in the inflation process—namely, labor compensation. This factor is a major component of business costs and can therefore affect the prices that firms charge for their products. A month ago it appeared that compensation was growing quite modestly. … However, recently revised information on compensation per hour suggests that wages and benefits are growing rapidly.  This blurs the picture considerably, since another measure, the Employment Cost Index, shows only moderate growth.

Potential GDP has got to be something in the neighborhood of 3% to 3.5% over the next few years.

From Q&A session as reported by Bloomberg News

These changes in labor force growth also imply that, in the absence of changes in productivity trends, our estimates of potential GDP growth should be revised down 2 or 3 tenths of a percentage point to near 3 percent.

Over the past two years, economic growth has averaged just over 3 1/4 percent, moderately above current estimates of the growth rate that is sustainable in the long run. As a result, the economy now appears to have moved within range of the full utilization of its resources—in other words, the slack in labor and product markets that was apparent a year ago has most likely been eliminated.

Many economists believe that the US economy's potential growth rate is around 3.25%, so a 3% growth rate, while somewhat below potential, may be a desirable development to keep the economy from overheating.

I’m not convinced that foreign capacity is a major reason to shrug off concerns about the possibility of overshooting capacity in U.S. labor and product markets. And, as I’ve said, it appears that the economy is near full usage of resources, but it’s not clear whether we are slightly above capacity or below.