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Deputy Assistant Secretary for Macroeconomics Of The Office of Economic Policy Robert Stein Statement for The Treasury Borrowing Advisory Committee of The Bond Market Association

(Archived Content)


In the three months since the Committee last met, the economy has moderated somewhat, as expected.  Following a surge in overall activity in the first quarter – supported by strong consumer spending – declining residential construction and slowing business spending on equipment and software softened the overall growth pace.  Still, the labor market remains healthy and core inflation remains under control.    

According to the advance figures from the Bureau of Economic Analysis (BEA), real GDP grew at a 2.5 percent annual rate in the second quarter.  This followed a 5.6 percent pace of growth in the first quarter and a 1.8 percent pace in the fourth quarter of 2005.  The see-saw pattern of GDP growth has resulted largely from losses and recovery related to last fall's hurricanes and erratic patterns in motor vehicle sales and federal purchases.   Looking over the four quarters ending in the second quarter to smooth out the temporary accelerations and decelerations, real GDP grew 3.5 percent, a very solid showing.

The composition of the four-quarter growth is favorable to continued expansion.  Over the last four quarters, while real consumer spending has risen 3.0 percent, business spending on plant, equipment, and software rose 6.8 percent and exports rose 7.4 percent.  Faster growth in these latter two categories suggests continued support for productivity growth ahead – as businesses use the new capital purchased – and a more competitive stance abroad. 

Along with second-quarter figures, BEA also released revised estimates of real GDP since 2003. The revisions were not unusually large and left the quarterly pattern of real GDP growth largely unchanged.  On average, annual real GDP growth from 2002:Q4 to 2005:Q4 was marked down by 0.3 percentage point to 3.4 percent from 3.7 percent previously.  Because national accounts data are used to calculate labor productivity measures, estimates of labor productivity from 2003-2005 will also be revised.

The outlook for future business spending to expand capacity and continue the recent strong productivity performance is relatively positive.  Corporate profits grew strongly in the first quarter (latest available) and as a share of GDP are at their highest level since 1966.  These profits represent not only the potential for future capacity expansion, but also the potential for future hiring and increases in worker compensation.

The unemployment rate during the second quarter averaged 4.6 percent, the lowest quarterly unemployment rate since the second quarter of 2001.  The rate has fallen about half a percentage point in the last year.  Payroll job gains averaged about 108,000 in the second quarter, down somewhat from the first quarter average of 176,000.  Over the last year the economy has added more than 1.8 million jobs.  Job gains will help to keep incomes up, which will continue to support expansion.

Inflation increased in the second quarter, largely due to energy price increases.  Consumer prices were up 4.3 percent from year-earlier levels in June, while consumer energy prices were up more than 23 percent and gasoline prices were up more than 33 percent.  In late March, the price of a barrel of West Texas Intermediate crude was about $66 per barrel, while in late July it has averaged about $74 per barrel.  Consumers are once again facing gasoline prices in excess of $3 per gallon.  Strong demand for petroleum-based fuels and geo-political considerations are probably boosting oil prices.

Outside of food and energy prices, core inflation was much more contained.  Core inflation was 2.6 percent in the year ending in June, the biggest twelve-month increase since late 2001.  Some statistical quirks may be partly responsible; a firming home rental market may be raising rents, which are used in constructing the owner-equivalent rent measure for housing costs.   Looking back, the weakness in the home rental market as buyers took advantage of low interest rates to acquire a home may have lowered rents in 2003 and 2004, perhaps making inflation appear too low in those years.

In sum, despite recent ups and downs, the overall economy appears to be in a good position to continue growing at a moderate pace – around 3 percent – for the remaining quarters of the year.  

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