We at the Federal Reserve Bank of Kansas City believe that the national economic outlook continues to be very good. Economic growth is likely to be 3 to 4 per cent in coming months. Though slower than recent growth, this is a strong pace. Moreover, the moderating rate may help reduce imbalances in the economy and allow it to grow at a more sustained rate over a longer period of time. At the regional level, we think the economy will continue to perform strongly into the new year, though agricultural prospects continue to be weak and there are some signs of slowing in the region's manufacturing and housing sectors.

At the Fed, our primary job is to promote price stability, so we are watching the inflation situation very closely - labor markets still are very tight and energy prices are an uncertainty going forward. Yet there are positive developments on the inflation front. Investment spending nationally and in the region remains strong, which bodes well for continuing strength in productivity. As firms invest in more productive plants and equipment, increased output allows wages to grow more rapidly without sparking inflation. Though labor markets across the nation and in the region are tight, job growth is slowing, contributing somewhat to a slower, more sustainable overall pace of economic growth, especially in sectors like housing. And because the so-called "wealth effect" from the rising stock market in recent years appears to have moderated, consumer spending may grow more slowly, but at a still-strong pace.

All of these elements help bring about growth with relatively modest inflation. Yet we must keep an eye on tight labor markets and energy prices, in particular, because of the risks to the inflation outlook. Although slower overall growth suggests some easing of demand in labor markets, and perhaps less wage pressure, there are important uncertainties surrounding energy prices going forward. In general, although no one can predict the future, we believe there will be some relatively modest impacts on overall economic growth and general price levels over the next few quarters from higher energy prices, though the impacts may well vary from industry to industry.