Press Releases

Assistant Secretary of the Office of Economic Policy Mark J. Warshawsky Statement for the Treasury Borrowing Advisory Committee

(Archived Content)


Economic activity accelerated in the third quarter after what turned out to be a slight and temporary slowing in the second quarter.  The labor market also continued to improve.   Nonfarm payroll employment rose by 309,000 during the quarter, resulting in 13 straight months of job increases for a total of 1.9 million new jobs created (adjusted to incorporate the BLS estimated benchmark revision to March 2004 employment).   The unemployment rate held steady at 5.4 percent in September, its lowest rate since October 2001 and below the average of each of the past three decades.   These are very positive developments that have helped lift compensation in the third quarter at a 3.3 percent annual rate in real terms, the largest advance this year.

Last week the Commerce Department reported that real GDP, which had increased at a respectable 3.3 percent annual rate in the second quarter, followed up with a 3.7 percent gain in the third quarter.   The composition of growth in the third quarter was favorable, with real final sales up at a 4.2 percent rate the strongest increase in a year.   The pickup chiefly reflected renewed growth of personal consumption expenditures.   These expenditures rose at just a 1.6 percent annual rate in the second quarter but that was followed by a 4.6 percent surge in the third quarter as consumer outlays for a variety of goods strengthened, especially for motor vehicles.   Consumer expenditures for motor vehicles and parts had declined in each of the previous three quarters, but rebounded at more than a 27 percent seasonally adjusted pace in the third quarter.   Part of that turnaround reflected the response to more generous motor vehicle incentives.

Business investment continues to be another key driver of economic growth.   After rising at an average annual pace near 12 percent over the last year and a half, real investment in equipment and software extended that string into the third quarter, increasing at a 14.9 percent annual rate.   Investment in structures has also improved during the last year and a half and continued to grow in the third quarter.

Gains in corporate profits, favorable tax incentives and confidence in the economic expansion have supported the rise in investment.   Based on the latest available data through the second quarter, the GDP measure of corporate profits (with inventories and depreciation adjusted to reflect replacement cost) has risen 19 percent over the past year, chiefly from domestic nonfinancial corporations.   Profit margins (as a share of gross domestic income) are high, contributing to strong cash flow -- the internal funds available for investment.   Steady growth in profits and cash flow should continue to spur investment growth going forward.

Real residential investment grew at a moderate 3.1 percent rate in the third quarter.   Despite quarterly fluctuations, the housing sector remains very strong.   Through the first three quarters of the year, the rates of new and existing home sales are both above the record-setting annual levels of last year.   Mortgage rates remain low and have come down from just over 6 percent a few months ago to 5.7 percent in October.  Housing starts rose at more than a 10 percent rate in the third quarter, indicating renewed growth ahead for home construction after unusually stormy weather in the third quarter may have affected construction activity.  

Inventory investment was a moderate negative factor in the third quarter.   A widening trade deficit was also a drag on growth as it was in the previous three quarters, but the 0.6 percentage point subtraction was much less than the 1.1 point negative contribution in the second quarter.   Exports rose at a 5.1 percent rate in the third quarter and have been growing robustly for five straight quarters, but they continue to be more than offset by a larger volume of imports.   Although there are signs of firming in demand for U.S. exports, slower economic expansion among many of our major trading partners than in the United States continues to be a factor in the faster growth of U.S. imports than exports.

Budget results for fiscal year 2004 came in better than expected.   The July Mid-Session Review had projected a budget deficit of about $445 billion, but growth in the economy and jobs yielded a deficit of only $413 billion, equivalent to about 3‑1/2 percent of GDP.   This is much lower than deficits in the 4-1/2 to 6 percent of GDP range at various times in the 1980s and 1990s.   With continued economic growth and job creation, along with spending restraint, the Administration's policy is to cut the deficit in half over the next five years to less than 2 percent of GDP.

Consumer price inflation remained contained in the third quarter, rising at a 1.9 percent annual rate, although there was some evidence of rising producer price pressures at earlier stages of processing.   The broadest measure of inflation, the GDP price index, rose at only a 1.3 percent pace in the third quarter.

Developments in oil markets continue to be a concern.  The oil intensity of U.S. GDP has fallen by nearly half since the first oil shock in the early 1970s, but the price of oil remains a key variable in the macro outlook.  To deal with the temporary reduction in oil production from the Gulf of Mexico resulting from the recent run of hurricanes, the Administration authorized the release of oil from the Strategic Petroleum Reserve.  This has helped contain prices and illustrated the long-held Administration stance that the SPR should be used only in the case of a true supply disruption. 

 At the same time, the still-high price of oil also illustrates the importance for our economic security of follow ing through on the Administration's proposals to enhance domestic energy supplies and to adopt technologies to use energy more efficiently.

In sum, despite the concerns raised by high and volatile oil prices, recent macroeconomic data suggest the economy is already strong and continues to improve.  Real growth continues to be above trend, the unemployment rate is low and moving down, inflation is low, and the budget situation is improving faster than expected.