When you were here three months ago, the economy had completed a quarter of 6 percent real growth, more than twice the private consensus expectation when the fourth quarter began. It was clear at the time, however, that there had been special positive factors pushing up growth in the fourth quarter which were unlikely to be repeated in the first quarter, and some which might reverse. There had been a rebound in the fourth quarter from effects of the General Motors strike earlier in the year, unusually favorable weather for construction activity that persisted well into the winter months, and improvement in net exports which came at a time when the fundamentals seemed to point more toward further deterioration than improvement.

In view of those considerations, it seemed likely that a slower pace of real growth might emerge in the first quarter for statistical reasons alone. That turned out to be the case. Last week the Commerce Department reported first-quarter real growth of 4-1/2 percent, down from 6 percent in the fourth quarter. But one would be hard pressed to explain in what important respect the first quarter was weaker than the fourth. If anything, it appears to have been stronger. Gross domestic purchases, a measure of domestic demand calculated as GDP less net exports increased at a 6.8 percent annual rate in real terms in the first quarter after increasing at a 5.4 percent rate in the fourth.

The reason that growth in real GDP fell between the fourth and first quarters was that net exports subtracted nearly 2-1/2 percentage points from first quarter real growth after adding about « percentage point to the fourth quarter. There has been a recurrent tendency for net exports to improve temporarily in the final quarter of a year and then to deteriorate in the following first quarter. This seems to reflect residual problems in seasonal adjustment of the trade data and was probably aggravated in its effect late last year by a bunching of aircraft exports. While primarily a statistical phenomenon, it tends in the current situation potentially to obscure full recognition of the strength of domestic demand.

In terms of domestic considerations alone, there were few signs in the first quarter data of any emerging imbalances that might seem to threaten continued expansion. Business capital spending was well maintained a little below the fourth-quarter rate. Residential construction activity remained at a high level in the first quarter with good prospects for the future. Early last year, inventory investment seemed to be moving up to an unsustainable pace, but over the course of the year it gradually subsided. In the first quarter of this year, inventory investment was moderate and seemed to be closely aligned with sales. Inventory-sales ratios are currently at low levels by historical standards.

The economy has averaged close to 4 percent real growth for the last three years with only minor variations from quarter to quarter, such as between the final quarter of last year and the first quarter of this year. Perhaps the most remarkable feature of recent experience is the combination of solid growth with a low, and by some measures even declining, rate of inflation. In terms of the chain-weighted GDP price index, inflation fell over the past three years from about 2 percent to less than 1 percent. In the first quarter, this measure of inflation did rise to a 1.4 percent annual rate from 0.8 percent in the fourth quarter. A one-time Federal pay raise accounted for about 0.2 percentage point of the acceleration.

Good inflation performance received further confirmation last week with the release of the employment cost index, our most comprehensive measure of the cost to employers of employee wages, salaries and benefits.

• The employment cost index rose by only 3.0 percent in nominal terms during the twelve months ending in March, well below the market expectation of a 3.4 percent rise, and down from a twelve-month increase of 3.7 percent only six months ago.
  

• There was a 3.3 percent increase in wages and salaries (down from 4.0 percent six months ago) and a 2.3 percent increase in benefit costs (down from 2.6 percent six months ago). There is some indication that weakness in incentive pay in the high-flying finance, insurance and real estate sector may have had a measurable impact on the latest results.
  

• The recent behavior of compensation costs is most unusual given tight labor markets with the unemployment rate at 4-1/2 percent or below for the past year. In combination with the more rapid growth of productivity, it has meant less-than-expected inflationary pressures and sharp increases in private wages and salaries in real terms.

Direct information on the second quarter is still very limited but generally positive. The report this Friday on the April employment situation will provide the first comprehensive view.

• During the week ended April 24, initial claims for state unemployment insurance benefits fell by 20,000 to 294,000. The sizable decline reversed most of a runup that occurred at the beginning of the month. Along with the recent behavior of continued claims and the state-insured unemployment rate, this suggests that labor markets remain very tight.
  

• A sharp rise in orders for nondefense capital goods excluding aircraft at the end of the first quarter, as well as the fact that orders have been above shipments for several months, suggests that business equipment investment may post another solid increase in the second quarter.
  

• Scattered reports on chain store and auto dealer sales suggest some moderation from the steamy first-quarter pace with the early date of Easter possibly having pulled some retail sales into late March. Consumer confidence surveys remain at relatively high levels.
  

• The National Association of Purchasing Management index fell back a little in April but remained above the 50 percent level which indicates that manufacturing activity is expanding.

The economy grew strongly in the first quarter without signs of increased inflationary pressure or cyclical imbalance. This extends a long record of good performance, generally exceeding consensus expectation, and suggests that further gains lie ahead. Information on the second quarter is too limited at this stage to provide much guidance, but continued expansion, possibly at a rate closer to the economy's long-term potential, would seem to be a likely outcome.

That is a summary of recent economic developments and the near term economic outlook.