- The Washington Times - Tuesday, April 30, 2002

Registering a sizzling 5.8 percent annual growth rate during the first quarter, the U.S. economy expanded at its fastest pace since the fourth quarter of 1999, seemingly burying what would prove to be the mildest recession in postwar history. Closer inspection, however, indicates that the expansion still is not as firmly entrenched as the first quarter's growth acceleration might suggest.

Changes in inventory accumulation accounted for 3.1 percentage points, or more than half, of the quarter's 5.8 percent growth rate. That meant that final demand the crucial aggregate economic statistic that represents gross domestic product less changes in inventories grew by a much less robust rate of 2.6 percent. Given the impressive growth rates in productivity in recent years a trend that continued even during the economic slowdown final demand would probably have to grow by an annual rate greater than 3.25 percent in order for the unemployment rate to fall. Today, unemployment stands at 5.7 percent, or nearly two percentage points above the previous expansion's cyclical low of 3.9 percent.

Last week's Commerce Department report on first quarter economic activity essentially confirmed Federal Reserve Chairman Alan Greenspan's analysis. In his April 17 congressional testimony, Mr. Greenspan observed, "The behavior of inventories currently is the driving force in the near-term outlook." The Fed chairman concluded: "The pickup in the growth of [economic] activity, however, will be short-lived unless sustained increases in final demand kick in before the positive effects of inventory investment dissipate."

R. Glenn Hubbard, chairman of the White House Council of Economic Advisers, told reporters that the key to long-term economic expansion is "a sustained turnaround in business investment." Indeed, more than any postwar economic downturn, the recent recession was caused by a major and sustained reduction in business investment. During the second half of last year, such business investment had been declining by more than an 11 percent annual rate. During the first quarter of 2002, that decline decelerated to less than 6 percent; and business spending on equipment and software finally seemed to bottom out, falling by only 0.5 percent. In terms of business investment, the worst may be behind us.

Meanwhile, consumer spending, which held up quite well even during the recession, increased at an annual rate of 3.5 percent during the first quarter. Exports, which declined by an average annual rate of nearly 14 percent during the previous three quarters, increased by nearly 7 percent during the first quarter. Reflecting the nation's response to the September 11 terrorist attack, spending for national defense increased last quarter at the fastest rate since the Vietnam War.

With inflation remaining extremely subdued, the Fed, as Mr. Greenspan indicated, will be free to maintain its accommodating monetary policy in the near term. Moreover, it should now be clear to all that the president's tax cut helped to sustain consumer spending since last summer, significantly moderating the impact of the recession that began less than two months after Mr. Bush entered office. Now let us talk about the Bush recovery instead.

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