April 26, 2002
U.S. Economy Jumps Off the Sick Bed
Getting a read on the U.S. economy these days is like trying to figure out how the motor on your boat is running just at the moment when a big wave pushes you ahead. The forward movement is obvious, but what is the cause?
The startling new vitality in the first quarter national economy is also obvious in the Bureau of Economic Analysis's report on U.S. Gross Domestic Product. The news that the national economy expanded at a robust 5.8 percent rate puts the final nail in the coffin of the short-lived 2001 recession. The effects of that downturn will linger on for many workers, businesses and governments, but for policy makers, the time for stimulus is clearly over.
To say that the estimate of overall growth came in on the high side of analysts' expectations would be an understatement. But even though the overall economic strength took many of us by surprise, the pattern of growth did not. As expected, inventories expanded, consumer spending remained strong, and Federal defense spending surged.
But after three straight quarters of double digit declines, the 6.8 percent rate of growth in exports was a pleasant surprise. The lethargic growth of our major trading partners, as well as the strength of the U.S. dollar, had lulled forecasters into believing that the first three months of 2002 would be more of the same for exporters. But the same pickup in world economic activity that has pushed energy prices up -- particularly in Asia -- has also helped fuel an increased worldwide appetite for U.S. goods and services.
The real player in the economic recovery, however, continues to be the American consumer. After almost single-handedly keeping the economy's head above water in the last quarter of 2001, consumer spending at least got a little help from other sectors in the first three months of 2002. But building upon the 6.1 percent increase in spending at the close of last year, consumers managed to kick off the new year by pushing spending levels higher, expanding at 3.5 percent annual rate. That overall growth was managed in spite of a slight cooling off in spending on durable goods, down by 8.0 percent from their unsustainably high levels at the close of last year.
But also pushing us ahead in the first quarter were two forces that may not be as long-lived. One of those is business spending on inventories. Even though businesses nationwide continued to slash their inventories by $36 billion in the first quarter of 2002, that contraction was much lower than the $119 billion rate of draw down the economy experienced. The net result was significant stimulus to the industrial economy, ultimately adding more than three percentage points to overall growth.
As has been the case in previous recessions, the swings in inventory investment for the last four quarters have tended to exaggerate the ups and downs of overall growth. If you look at growth in final sales, which excludes these effects, the growth in the economy shrinks to just 2.6 percent in 2002, whereas the recession at its worst only produced a 0.5 percent decline.
Another post that propped up overall growth in the first quarter was government spending. The days of flat or declining federal defense spending are clearly over, and the 19.5 percent rate of expansion that sector experienced in the first quarter was not unexpected. But that stimulus also carries a price tag, which we'd be wise not to ignore.
The economy of 2002 will present us with plenty of challenges, but it appears that producing growth will not be one of them.
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