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• U.S. Department of State

Summary

U.S. real GDP growth has been positive for 18 consecutive quarters, and the economy is considered to be in an "expansion" phase. As of the second quarter 2006, real or inflation-adjusted growth was nearly 16% above its previous high near the end of the 1991-2001 expansion. Real GDP grew at an annualized quarterly rate of 2.6% in the second quarter of 2006, down from a 5.6% rate during the first quarter. This compares with annualized rates of 3.4%, 3.3%, 4.2%, and 1.8%, respectively, over the four quarters of 2005. The corresponding rates over the four quarters of 2004 were 3.9%, 4.0%, 3.1%, and 2.6%. The rebound in payroll employment has been modest compared with past expansions. During September 2006, it was about 4.7 million above the level prevailing at the end of the recession (November 2001), but only about 3.1 million above the peak of the last expansion (March 2001). The unemployment rate rose to a high of 6.3% in June 2003; it has since declined and now (September 2006) stands at 4.6%, equal to the expansion low first achieved in May. The low achieved during the last expansion was 3.8%. The other elements in the economic picture are promising: (1) A pick-up in output at the same time as employment is growing slowly means that productivity (or output per worker) is increasing. As seen in the 1990s, productivity growth is the key to raising the standard of living and is not necessarily associated with weak labor markets over time. The United States eventually experienced both rapid productivity and strong employment growth as the recovery broadened and deepened throughout the decade. (2) The headline inflation rate, measured by the CPI, rose 3.4% during 2005. This was largely driven by rising energy prices as the core inflation rate, which excludes food and energy, rose only 2.2%. For the three months ending in September 2006, the headline CPI rose at an annual rate of 0.8%. Excluding food and energy, the annualized rate was 2.7%. Thus, it can be argued, the underlying or core rate of inflation appears to be rising as well. The consensus among economists is that GDP will grow between 3.3% and 3.5% in 2006. The unemployment rate is expected to show little tendency to change. The inflation rate is expected to be higher than the rate that prevailed in 2005. On 17 occasions beginning on June 30, 2004, and concluding on June 29, 2006, the Federal Reserve has increased the federal funds rate target by ¼%, raising the target to 5¼% from 1%. No additional tightening has been undertaken at four subsequent meetings. Fiscal policy tightened during 2005 and 2006. The international trade deficit is large and expected to remain so. This report will be updated monthly.

Related Legislation:
• S.3
• S.2

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