RL30329
Current Economic Conditions and Selected Forecasts
February 17, 2004
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Summary
U.S. real GDP has been positive for nine consecutive quarters, and the economy is considered to be in an "expansion" phase.1 As of the fourth quarter 2003, inflation-adjusted growth was more than 7.2% above its previous high near the end of the 1991 - 2001 expansion. Real growth declined to 4.0% in the fourth quarter from its rapid pace of 8.2% in the third quarter (at annualized quarterly rates). Third quarter growth was the strongest quarterly growth since late 1999. Even during the 1990s expansion, the pace of growth was rarely over 7%. Yet the rebound in growth has not translated into higher payroll employment, and many call this a "jobless recovery." Payroll employment has declined by 745,000 since the end of the recession, although there has been improvement since August. The unemployment rate rose to 6.4% in July 2003. It has since eased to 5.6% in January 2004, but remains well above rates in the second half of the 1990s. There are however positive elements of the economic picture: (1) A pick-up in output at the same time as employment is declining means that productivity (or output per worker) is increasing. As we saw in the 1990s, productivity growth is the key to raising our standard of living and is not necessarily associated with weak labor markets over time. We eventually experienced both rapid productivity and strong employment growth as the recovery broadened and deepened throughout the decade. In the short run while adjustment is taking place, however, there is a human toll from the continuing payroll employment losses. (2) Inflation has decelerated over the year. This has raised concerns about deflation. A low inflation environment is favorable for economic activity. While most economists did not expect the sizzling third quarter pace to be sustained, they anticipate that growth will settle down to around 4% over the next year, still above what is considered to be the long-run potential rate of growth. However, the unemployment rate is expected to show only a modest change as long as businesses are able to improve profitability through increased productivity. Inflation is expected to remain low while considerable slack remains in the economy. Fiscal and monetary policies have both been eased since 2001 and the easing has continued into this year. They are having a positive effect on spending. The external deficit is large and expected to remain so. This report will be updated monthly.
