Thursday, May 27, 2004

An updated report on first-quarter economic activity issued by the Commerce Department yesterday confirmed that the U.S. economy continues to perform at an impressive pace. Indeed, the report upwardly revised the annualized first-quarter growth rate of gross domestic product (GDP) to 4.4 percent. Even more importantly, during the past four quarters, the economy has expanded at a 5 percent rate. That is the fastest pace over any consecutive four-quarter period since 1984, when President Reagan coasted to a landslide victory.

While each quarter’s annualized growth rate presents an important picture of what occurred during that particular three-month period, economists generally prefer to examine the trend of an economy’s expansion by comparing how the four-quarter growth rate has changed from one year to another. That is why the 5 percent rate over the past four quarters is so important. Moreover, the four-quarter growth rate has accelerated during each successive four-quarter period since the second quarter of 2003. For the four quarters ending in March of last year, the growth rate was 2.1 percent. Comparable four-quarter growth rates have subsequently accelerated to 2.4 percent (ending in June 2003), 3.6 percent (ending in September), 4.3 percent (ending in December) and now 5 percent (ending in March). If the annualized growth rate for the second quarter meets the 4.6 percent projected in a Wall Street Journal survey of economists, then the four-quarter growth rate would reach an eye-popping 5.4 percent through the second quarter.

Other data confirm the economy’s growing strength. During March and April, for example, a total of 625,000 jobs were created. The seven-year-old non-manufacturing index compiled by the Institute for Supply Management reached a record high in April.

Meanwhile, profits are soaring. Compared to the first quarter of last year, corporate profits with inventory and capital-consumption adjustments were nearly a third higher last quarter. These profits are being reinvested. Following nine consecutive quarterly declines, business investment has now grown four quarters in a row. Business investment during the first quarter was 9 percent higher than a year earlier.

While prices have risen in recent months, the trend over the past year remains moderate. For example, the GDP price index rose at an annual rate of 2.6 percent in the first quarter, but it is only up by 1.7 percent during the past year. Thus, even as the Federal Reserve prepares to begin raising short-term interest rates in response to rising prices, monetary policy will remain quite stimulative over the next several quarters, as will fiscal policy. Under the assumption that employment gains remain robust, and the economy will sustain itself at an impressive pace, the presidential election this year will likely take place within an auspicious economic climate.

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