Press Releases

Acting Assistant Secretary of the Office of Economic Policy Mark J. Warshawsky Statement

(Archived Content)



For the Treasury Borrowing Advisory Committee of the Bond Market Association

The economy continued to experience strong growth in the three months since the Committee’s last meeting.  While the pace of activity tapered from the unsustainably rapid rate of the third quarter, growth in real GDP in the fourth quarter was still very favorable at a 4.0 percent annual rate.  That is well above the potential rate of growth of the economy, currently estimated by the Administration at 3.1 percent.

Real consumer spending continued to rise at a solid 2.6 percent annual rate in the fourth quarter even after growing at a 6.9 percent pace in the third quarter, the fastest pace in 17 years.  Confidence is rising, with both the University of Michigan and Conference Board measures moving up in the fourth quarter to their highest levels in more than a year and surging further in January.  Motor vehicle sales strengthened through the quarter and in December were at an annual rate of 17.9 million units, the second-highest monthly selling pace of the year.  Gains in consumer spending are expected to be maintained this year as well, as jobs and incomes rise.  In addition, last year’s tax cuts are expected to continue to help lift the economy in the first half through higher refunds.

Households also continued to spend money on new homes, and the housing sector added more than 1 percentage point to real GDP growth in the third quarter and almost that much in the fourth.  The number of housing starts surpassed an annual rate of 2 million in the final quarter of the year and 2003 marked the best year for homebuilding since 1978.  The high level of housing starts at the end of last year implies another large contribution to growth from residential construction in the first quarter.

Business optimism has improved as well and that has translated into a strong upward track for investment.  Corporate profits rose strongly in the third quarter and earnings reports for the fourth quarter have been very positive so far.

 Roughly two-thirds of S&P 500 companies reported fourth-quarter results in January and almost 70 percent of those beat analysts’ estimates.  Equity prices have risen, with the S&P 500 increasing 26.4 percent last year after three straight years of decline.  In addition, corporate interest rates have come down in tandem with the benchmark 10-year Treasury and yield spreads have narrowed. 

Profit growth, low interest rates, and increased certainty that a sustained economic recovery is firmly underway, along with the investment-enhancing provisions of last year’s stimulus legislation, have led to continued gains in business investment in equipment and software.  That spending rose at a 10 percent annual rate in the fourth quarter, bringing growth over the four quarters of 2003 to almost 9 percent compared to an increase of just 1.6 percent over 2002.  Additional gains are likely this year, with the consensus of private forecasters expecting about a 10 percent rise in business fixed investment for 2004 (as measured year/year).

Strong demand on the part of consumers and businesses has spurred manufacturers to boost production at a 6.6 percent annual rate in the fourth quarter, the largest increase in 3-1/2 years.  Some of that production went into inventory rebuilding, as businesses began to restore  depleted stocks in the fourth quarter after reducing them in the prior two quarters.  Exports have started to turn around and the economies of our major trading partners have strengthened a bit.  After three quarterly declines, U.S. exports in real terms increased in the last two quarters of 2003.

Growth in profits and the consequent pickup in investment has been helped along by low unit labor costs, which have been held in check by exceptional productivity growth over the past few years.  Since the fourth quarter of 2000 and through the third quarter of last year, productivity in the nonfarm business sector has surged at a 4.4 percent annual rate, the strongest performance of any comparable period in 40 years.  High productivity growth contributed to low inflation, with consumer prices rising only 1.9 percent over the 12 months of 2003 and the core rate (excluding food and energy) up just 1.1 percent, the smallest increase since 1966.  The low inflation environment has allowed the Federal Reserve to maintain an accommodative monetary policy stance, holding the target federal funds rate at 1.00 percent since the end of June.

Another favorable feature of current economic developments is an improving labor market, although job growth is not as strong as we would like.  Labor markets began to turn around last summer, and the unemployment rate came down from 6.3 percent last June to 5.7 percent by the end of the year.  Recent figures on initial claims for unemployment insurance benefits have been declining and are near a 3-year low, and surveys of business hiring have turned positive, such as those from the National Federation of Independent Business, the National Association For Business Economics, and the ISM for both manufacturing and non-manufacturing. 

In the last five months of 2003 the economy created 278,000 nonfarm payroll jobs compared to a loss of 6,000 in the same period a year earlier.  While the latest job gains were modest, employment is on an upward path.

The Administration projects further economic expansion and job growth this year and in the years ahead.  Real GDP is forecast to grow 4.4 percent on an annual basis in 2004, building on the forward momentum of the second half of 2003.  The unemployment rate is forecast to recede from the 5.9 percent average in the fourth quarter of 2003 to 5.5 percent in the fourth quarter of this year.  Over the following five years of the forecast horizon, real GDP growth tapers to its potential rate of 3.1 percent and the unemployment rate levels off at 5.1 percent, in line with the consensus of private forecasters.