April 25, 2003
The U.S. Economy Dodges a Bullet
The Bureau of Economic Analysis's report on first quarter growth in theU.S. economy has at least two important messages for those of us who keep track of such things. One is that the recession is over. The second is that there is more to economic activity these days than retail sales and factory output.
From the tone of recent media reports, the fact that the economy managed to grow at all during the first three months of 2003 was a surprise. By that standard the BEA's preliminary estimate of a modest acceleration inGross Domestic Product during the first quarter -- up to an annual rate of 1.6 percent -- has to considered a revelation.
Those low expectations for the first quarter economy were borne out of a mixture of fear and fact. Reports on retail sales, manufacturing output, and even housing at the mid-point of the quarter were abysmal. Add to that the more amorphous, but no less unsettling, concern over the outcome and impact of the Iraq war, and the prevailing wisdom among pundits was that the U.S. economy was in the tank.
But the data show that the real economy has refused to follow this dour script. The numbers show that the war displaced, but did not ultimately disrupt consumer spending. Thanks to a surprising drop inimports, an otherwise modest 1.4 percent growth in consumer spendinggave the economy more kick than it otherwise might have. And even though the backslide in business investment spending was disappointing, the overall reaction from analysts to the GDP report from BEA can only be a sigh of relief.
Having dodged this bullet, the spotlight can now turn to the prospects and challenges ahead for the remainder of the year. Tax cut proposals, a surge in military spending, and the ballooning Federal budget promise to make things interesting, at least. But minus the uncertainty of the war, and with the hope of at least some healing of relationships with our European trading partners, the prospects look brighter today than at year's beginning.
Which brings up a delicate point. Why, after six consecutive quarters of growth following the economic downturn of 2001, has the National Bureau of Economic Research still not officially declared the recession to be over? The NBER's speed in declaring the downturn has been strangely unmatched on the upside, even after the recent data make it clear that the economy stopped contracting eighteen months ago.
Perhaps the experts at Harvard have gotten too close to the data on the goods-producing side of the economy, where employment and productionlevels continue to falter. Certainly, the economy overall is still awash in excess capacity, limiting the extent to which output increases can perk up the labor and capital goods markets.
But the GDP data amply demonstrate that the overall economy -- where 4 out of every 5 workers is employed in the production of services -- can gain ground even as the production and sale of physical goods moves sideways. That's not the kind of growth story that kindles confidence for all of us, especially in the manufacturing-intensive Midwest . But it’s not a recession, either, and, by its silence, the NBER should stop calling it such.
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