- The Washington Times - Saturday, November 1, 2003

The much-delayed, eagerly anticipated, robust economic recovery appears to have arrived. The Commerce Department reported Thursday that the economy expanded at an annual rate of 7.2 percent during the third quarter. It was the fastest pace since the first quarter of 1984, when the economy grew at a 9.0 percent annual rate.

As expected, personal consumption expenditures, whose strength over the past two years has kept the post-September 11 economy from tumbling into another recession, were very strong, growing by 6.6 percent. Consumption was buttressed by a wave of cash-generating mortgage refinancings from the first half of the year, when long-term interest rates plunged to their lowest levels in decades. On top of that, an estimated 25 million families received rebate checks in July, representing the $400 increase in the per-child tax credit that Congress passed during the spring. Altogether, the 2003 tax cuts injected an estimated $61 billion into the economy through September. For the 2004 fiscal year, which began Oct. 1, taxes will be cut nearly $150 billion, providing the economy with a continuing boost from fiscal policy.

Meanwhile, the Federal Reserve’s monetary-policy committee met Tuesday and reiterated its intention to maintain “policy accommodation” for a “considerable period.” In other words, the money spigot will remain open for some time.(Inflationary pressures remained dormant during the third quarter.) After reviewing the economy’s performance over the past six weeks, the Fed further noted that “spending is firming, and the labor market appears to be stabilizing.”

A stabilizing labor market is one that generates jobs at a rate commensurate with a strong recovery. During the 22 months (through September) since the 2001 recession ended in November of that year, nonfarm payrolls still lost more than 1 million jobs. That occurred because the economy was growing so slowly and output per worker was rising so rapidly. For the first time since January, employment increased in September, albeit by a relatively meager 57,000 jobs. If the expansion has reached its robust stage, a stable labor market should begin producing monthly payroll additions of 250,000 to 300,000 jobs.

A stable labor market is also essential in order for the recovery to begin to build upon itself as job creation generates greater demand, which in turn encourages businesses to increase both their output and their capital expenditures. (Propitiously, business investment increased at a 11.1 percent annual rate in the third quarter, highlighted by a 15.4 percent jump in spending on equipment and software.)

Eventually, the cycle becomes virtuous, as it feeds upon itself — producing the kind of expansion that the American economy experienced following the 1981-82 recession and the 1990-91 recession. It is too early to say that such a lift-off stage has been reached, but with monetary policy and fiscal policy both operating strongly in their expansionary phases and with the economy responding in kind, the odds are now much better that the robust recovery has finally arrived.


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