The roots of stable expansion extend well beyond the Greenspan era.

The New York Times, "Economic Scene" , January 25, 2001

As Alan Greenspan testifies in Congress today, nervous investors and business executives will be looking for any hint of future Federal Reserve policy. From populist talk show hosts to Wall Street traders, many Americans believe Mr. Greenspan, as chairman of the Fed, almost single-handedly controls the economy of the United States.

He is the "maestro," as the title of a recent book by Bob Woodward puts it. Suppose, then, that the behavior of the economy changed in a way central bankers have long sought. Wouldn't it be natural to credit Fed policy?

That change has indeed occurred. Economic output doesn't bounce around as much as it used to. Instead of booming for a quarter or two and then crashing the next, overall growth rates are much steadier. During the prolonged boom of the 1990's, the economy was much less volatile than in earlier expansions.

This calmer economic ride didn't start in the last decade, however, or with Mr. Greenspan's appointment to the Fed in 1987. It goes all the way back to the first quarter of 1984. That's the moment Margaret M. McConnell, an economist at the Federal Reserve Bank of New York, and Gabriel Perez Quiros, an economist for the European Central Bank, call "the break" in the volatility of economic activity. They pinpointed that date using advanced statistical techniques, publishing their results in an article in the December issue of The American Economic Review.

Nailing down the exact turning point may require high-powered math, but anyone eyeballing a graph of changes in the growth rate of the nation's gross domestic product can see the general pattern. Swings that used to look wild and scary -- like the electrocardiogram of someone in serious heart trouble (and they did cause heart palpitations in many a business executive) -- settled down in the mid-1980's.

For this column, the researchers updated their work to include data through the third quarter of 2000, the most recent available.

Despite the bumps in the economy lately, the results were the same. "It's true that G.D.P. growth has varied a bit more than usual in recent quarters," they noted in an e-mail message. But "it is still nothing like the kind of fluctuations that used to occur prior to 1984 on a regular basis."

"Back then, swings like we've seen recently occurred practically every year." Does good Fed policy deserve credit for this unprecedented stability? It's an important question, since what the Fed gives, the Fed can take away, either through mistakes or changes in inflation-fighting goals.

Public policy is transitory, private-sector progress less so. And we can thank "progress" rather than "policy" for this particular good news, argue James Kahn of the New York Fed along with Dr. McConnell and Dr. Perez Quiros in a paper presented at the recent meetings of the American Economic Association in New Orleans.

The researchers don't deny that good policy is important. (They do, after all, work for central banks.) But their work demonstrates that private-sector changes in organization and technology "may be as important, or even more important, than policy," Dr. Kahn says.

Monetary policy affects the whole economy, including investment and consumption. If Fed decisions had reduced the economy's volatility, every sector would be affected, and the change would definitely show up in sales fluctuations. That's not what the data show. Instead, a single sector -- durable goods -- accounts for most of the change. And production levels have stabilized much more than sales, which have just moderated a little bit.

Durable goods bought by consumers and business -- automobiles, furniture, aluminum, industrial machinery and the like -- make up less than one-fifth of economic output. But historically their production was so wildly volatile that it had a disproportionate effect on the fluctuations of total national income. That changed in the 1980's. Under pressure from foreign, particularly Japanese, competition, durable-goods makers changed their business practices. They adopted techniques of lean manufacturing and just-in-time logistics. They used information technology to get real-time data on sales and to restock customers more precisely.

While the news media lavished attention on the new economy, old-line industries dramatically remade themselves. "We're talking about even traditional manufacturers using better machines, being more flexible," Dr. McConnell says. "We're talking about retailers sharing information with their suppliers, so they can order more stock just in time."

These changes didn't just help American companies keep up with their foreign competitors. They made the overall economy more resilient. Shocks, like higher oil prices, may be just as great as they ever were, but they aren't magnified as much. Producers have more accurate and up-to-the-minute information about what's selling, and their plants are able to shift their product mix more quickly. As a result, they don't build up as much inventory of stuff no one wants.

Before, plants tended to keep cranking out durable goods even after demand slowed. As sales dropped, inventories became bigger and bigger. When manufacturers finally realized what was happening, they had to cut production sharply, not only to match lower sales but to eliminate their inventory overhang. That amplified economic woes.

"That's how you lose more jobs," Dr. McConnell says. "That's how you make an economic downturn more severe."

Now, durable-goods makers don't build up those giant inventories as much. So they don't have to make such traumatic adjustments, which used to include mass layoffs, to compensate for even a mild recession.

The researchers decline to speculate on the implications of their work for public policy. But one possible conclusion is that a less volatile economy may require quicker, finer adjustments from the Fed. The plunges of the past may be gone, but that doesn't mean recessions have disappeared.

"What may have been considered a moderate fluctuation in activity prior to the break may now be viewed as severe," the researchers write in the American Economic Review article. Instead of waiting for a major downturn in output, then, the Fed might want to cut interest rates when growth starts to slow just a little bit, lest that slowdown mark the beginning of a steady progression downward.

Regardless of the policy implications, the researchers agree that the economy has improved in a fundamental way. "This is a real-economy phenomenon," Dr. McConnell said. It represents genuine progress, driven by competitive pressure and innovative response, not transient policy or irrational exuberance. "We think it is a permanent feature of the economy," she said. "This isn't just good luck."