The economy continues to perform impressively. Output has grown strongly, the unemployment rate has fallen and core inflation has been relatively stable. All this has been achieved despite high oil prices and damaging hurricanes. Solid economic growth seems set to continue, albeit at a slightly slower pace. The projected moderation in growth reflects a lagged response to higher oil prices, higher interest rates and a cooling of the housing market. The stance of monetary policy, currently near neutral, needs to tighten slightly to keep the economy in balance. The federal government budget deficit seems likely to settle around 3% of GDP as higher spending on prescription drugs, defence and hurricane relief is offset by surprisingly strong revenue growth. Little progress has been made so far on reform of taxation, entitlements or other longstanding fiscal problems.