E C O N O M I C R E P O R T O F T H E P R E S I D E N T

Declining Relative Import PricesA decline in the relative price of imports can affect the short-term NAIRUin a manner similar to an acceleration of productivity. Competition fromimports restrains the markup of prices over unit labor costs and thus reducesprice inflation for a given rate of wage inflation. (A 1 percent decline in relativeimport prices lowers the inflation rate by 0.1 percentage point.) The 4percent annual rate of decline in the price of nonpetroleum imports relative toU.S. nonfarm business prices during 1997 and 1998 lowered nonfarm priceinflation by about 0.4 percentage point per year. The effect on the short-termNAIRU is similar to that of a productivity acceleration of the same magnitudeand can be argued to have lowered the NAIRU by about 0.5 percentage point.World price trends cannot be expected to continue to restrain inflation asmuch as they have in recent years. The relative price of nonpetroleumimports firmed in 1999, and with strength returning to overseas economies,these prices are likely to increase in 2000. In addition, the rebound in oilprices in 1999 may exert some upward pressure on prices of commoditiesthat use oil as an input.The Unemployment ForecastThe Administration’s projection of the unemployment rate roughly followsits projection of the short-term NAIRU and reflects the factors just discussed.The short-term NAIRU, which has been centered around 5¾ percentover the postwar period and in the mid-1990s, probably fell into the 4to 4½ percent range through the combination of the temporary help andInternet innovations to the labor market, the productivity surprise, fallingrelative import prices, and perhaps other factors. It is very difficult to quantifythe long-term effects of the temporary help and Internet innovations tothe labor market. For the purpose of its conservative forecast, the Administrationestimates that they account for roughly a 0.5-percentage-point permanentreduction in the NAIRU from its historical average, to a range centeredaround 5.2 percent. In contrast, the effects of the productivity surpriseand falling relative import prices are temporary and are expected to erodeover the next several years. As a consequence, in the Administration’s conservativeprojection, the unemployment rate edges up to 5.2 percent by2003 and remains at that level thereafter.The Near-Term OutlookAfter growing at a 4.3 percent annual rate over the past 4 years, real GDPis projected to decelerate to an annual growth rate of 2.9 percent over the fourquarters of 2000. This rate, which was slightly above the consensus projection92 | Economic Report of the President