- The Washington Times - Tuesday, March 4, 2003

Recall back to mid-November 2001, two months after the terrorist attacks. The economy had slowed down before September 11, and consumer confidence plunged after the attacks. In response, the Fed slashed short-term interest rates by a hefty half-percentage point three times since September 11, marking the eighth, ninth and 10th rate reductions of the year and preceding one more in December.

Meanwhile, two days before Thanksgiving, the National Bureau of Economic Research announced that a recession had begun in March 2001 and, given the tremendous jolt the nation had just suffered, was presumably ongoing. Under such circumstances, an economic growth rate of 3 percent during the next year, 2002, would have been considered a godsend.

On Friday, the Commerce Department revised (from 0.7 percent to 1.4 percent) its estimate of the economy's annual growth rate for the fourth quarter. The effect of that quarterly upward revision was to raise the growth rate during all of 2002 to 2.9 percent. Yet, even though the economy virtually achieved in 2002 what Bush administration policy-makers would have considered a godsend during the fall of 2001, nobody is celebrating, least of all in the White House. In fact, the administration's three top economic policy-makers in 2001 and 2002 (Treasury Secretary Paul O'Neill, National Economic Council Director Larry Lindsey and Council of Economic Advisers Chairman R. Glenn Hubbard) have all departed.

There's good reason for the angst. The 2.9 percent growth rate during 2002 was insufficient to prevent the unemployment rate rising from 5.6 percent during 2001's fourth quarter to 5.9 percent during 2002's final quarter. Indeed, between the month before the terrorist attacks and last December, the economy shed more than 1.25 million workers from nonagricultural payrolls.

While Commerce increased its estimate of growth to 1.4 percent for the fourth quarter, the fact remains that even that upward revision reflected a sharp deceleration from the third quarter's 4 percent annual growth rate. Moreover, absent an acceleration in defense spending, growth during the fourth quarter would have been less than 1 percent. Personal consumption expenditures, which have been keeping both the domestic and the world economies above water, increased by a minuscule 1.5 percent during the fourth quarter, less than half the rate for the whole year. And, given an explosion of imports, it appears that a growing share of consumption's decelerating pace is being met by demand for foreign goods, which, arithmetically, represents a subtraction from the economy's growth rate.

Since the end of 2002, oil and natural gas prices have soared, acting as a de facto tax increase on consumers, who may react by spending less on other goods. Meanwhile, the consumer sentiment index plunged in February, reaching its lowest level since 1993.

On the plus side, business investment expanded by a 2.5 percent annual rate during the fourth quarter, representing the first time in nine quarters that it did not fall. In addition, economy-wide inflation appears to pose little problem. The price index for GDP increased by only 1.1 percent for 2002, its lowest rate since 1963. So far, the absence of business pricing power has prevented surging energy prices from reflecting themselves in other sectors. However, the inability to pass on higher energy costs could have a negative effect on profits, a development that would put at risk the recent, albeit minor, expansion in business investment.

Thus, at the moment, both consumption and investment are weak, which is all the more reason for Congress to pass a substantive stimulus plan based on tax relief for increasingly battered and debt-ridden consumers.

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