- The Washington Times - Wednesday, March 3, 2004

The U.S. economy continues to show solid signs of strong growth. While the Commerce Department’s recent revision of the annual growth rate of fourth-quarter gross domestic product (GDP) only marginally adjusted the initial estimate upward from 4 percent to 4.1 percent, the internal dynamics that generated that relatively small change were much more revealing.

Look at what happened, for example, to the annual growth rate of gross private domestic investment, which includes business fixed investment, residential construction and changes in business inventory. Gross private domestic investment increased by 14.8 percent in the third quarter, when GDP roared ahead at a 8.2 percent annual rate. The initial estimate for the fourth quarter showed such investment rising at a 12.4 percent annual rate. But the revised estimate boosted it to 15.8 percent. It was the third consecutive quarter of solid investment growth. Over the past two quarters, the investment component of GDP has been rising at an annual rate in excess of 15 percent, strongly suggesting that the long-awaited investment-led expansion period in the business cycle has finally arrived.

Business fixed investment, which declined for nine consecutive quarters beginning in early 2001, increased by 9.6 percent during the fourth quarter. That followed impressive increases of 7 percent during the April-June period and 12.8 percent during the July-September quarter. Business investment in equipment and software for the fourth quarter was revised upward from 10 percent in the initial estimate to more than 15 percent in the latest data. With inventory stocks having fallen to record low levels relative to sales, the process of inventory replenishment began in earnest last quarter, contributing nearly 1 percentage point to the quarter’s overall growth rate. Analysts expect inventory restocking to continue well into this year, providing additional growth to the economy. Even though residential investment was revised downward somewhat, it still advanced at a solid 8.6 percent annual rate as the housing boom shows no sign of abating.

Responding to the declining dollar, U.S. exports robustly expanded for the second quarter in a row after declining throughout the previous nine months.

Early data for 2004 provide good reasons for optimism. The Index of Leading Economic Indicators advanced by 0.5 percent in January, when, according to the Federal Reserve, total industrial output increased by a solid 0.8 percent. January’s increase in manufacturing output brought its three-month annual rate of expansion above 6 percent. This week, the Institute for Supply Management (ISM) reported that its manufacturing index expanded for the ninth consecutive month in February, as every one of the 20 manufacturing industries it tracks experienced growth last month. The ISM’s recently rising employment index, which lags actual changes in manufacturing hiring, increased again in February, reaching its highest level since December 1987.

While nobody expects manufacturing to restore the more than 3 million jobs that sector has lost since mid-2000, the worst may soon be over. That would be a welcome change.

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