- The Washington Times - Wednesday, April 30, 2003

On Friday, the Commerce Department's advance estimate of the annual growth rate of gross domestic product (GDP) for the first quarter joined a slew of other recent economic statistics in failing by a significant degree to meet consensus expectations.

Compared to the lackluster annual growth rate of 2.2 percent that surveys revealed most economists expected, the rate of economic growth for the first quarter came in at a much more disappointing 1.6 percent. In forming the so-called "consensus estimate" of 2.2 percent, economists, of course, were aware of the quarter's war jitters, bad weather, eroding consumer confidence and soaring energy prices. Yet, all these factors were cited, after the fact, to explain why the economy did not grow as fast as expected.

Here's an alternative explanation: The economy is in worse shape than many economists and analysts realize, including the Federal Reserve. That would explain why so many recent economic reports have proved to be more downbeat than expected. And it would justify a much larger tax-relief stimulus-and-growth package than Congress, in general, and the Senate, in particular, are considering. We understand why partisan Democratic senators oppose such economic relief measures, but why Republican Sens. Olympia Snowe, George Voinovich, John McCain and Lincoln Chafee oppose them is beyond us.

On Thursday, the Labor Department announced that first-time claims for unemployment benefits increased the previous week by 8,000 to 455,000, their highest level in more than a year. The consensus estimate projected that first-time benefits claims that week would fall by 14,000, just as the consensus estimate a week earlier forecast a rise of 10,000 in initial claims, compared to the actual increase of 30,000. Economic forecasters were also surprised by the depth of job losses in March (108,000 nonfarm jobs slashed from payrolls) and February (357,000 jobs).

Similarly, forecasters underestimated the decline in industrial output in March. Projections of a 0.3 percent decline were exceeded by the actual 0.5 percent decrease. And while the consensus estimate for unused capacity for March was 24.7 percent, the Fed reported on April 15 that unused capacity pierced the symbolic 25 percent level, reaching 25.2 percent last month. Meanwhile, last week the Fed, which has been projecting an upturn for months, revealed in its Beige Book that the previously reported lackluster pace of economic activity in January and February in its New York, Chicago, Philadelphia, Kansas City and Minneapolis districts had further deteriorated during March and the first two weeks of April. Consumer spending was "generally weak" across the nation, while "nine of the twelve districts reported slowing activity in manufacturing."

The dismal news from Commerce's report on first-quarter GDP, which is the broadest measure of national economic output, included the fact that the rate of increase in consumer spending continued to decelerate, crawling at 1.4 percent. It has been 10 years since consumer spending increased at a lower rate. Even during each of the first three quarters of 2001, when GDP declined, consumer spending increased faster than it did last quarter.

Nonresidential fixed investment (i.e., business investment), which had declined for eight consecutive quarters before increasing during the fourth quarter, resumed its trek south, falling at an annual rate of more than 4 percent in the first quarter. Business investment in structures, such as manufacturing plants, power plants and warehouses, fell for the sixth quarter in a row. (Business investment in structures is now less than 75 percent of its peak level, which was reached during the fourth quarter of 2000.) And business investment in equipment and software, which increased during each of the three previous quarters after declining for six quarters, began falling again. Meanwhile, exports fell for the second quarter in a row, confirming how slowly America's trading partners are growing.

How much longer must the economy perform well below its potential before Congress approves a stimulus-and-growth package sufficient to accelerate the feeble growth rate to close the gap?

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