U.S. economic activity expanded at an impressive 3.8 percent annual rate during the fourth quarter, according to upwardly revised data released recently by the Commerce Department. Meanwhile, inflationary pressures appear to remain well contained.
Measured on a fourth-quarter-over-fourth-quarter basis, the economy grew by 3.9 percent last year. During 2003, the economy expanded at a 4.4 percent pace. Indicative of strong, steady, sustainable growth is the fact that during each of the previous seven quarters, the economy has expanded at an average annual rate of 4.5 percent, while never falling below a growth rate of 3.3 percent.
Even more impressive has been the performance of business investment, which is important because it represents the physical capital that enables workers to increase their productivity. Rising productivity rates have been responsible for inter-generational increases in living standards. For that reason, investment arguably comprises the most important component of economic output. So, it is worth examining the recent favorable trends in investment in a more detailed light.
The two principal categories of business investment are structures (such as factories, warehouses, mines and power plants) and equipment and software (E&S). For example, E&S spending, whose annualized growth rate has averaged 14.6 percent over the past seven quarters, totaled $998 billion in 2004, or 20.8 percent higher than the depressed 2002 level. Now, however, despite sizzling annualized growth rates of 17.5 percent and 18 percent during the last two quarters, there appears to be no prospect of an E&S bubble developing. Business investment is now very strong, and that good news is worth celebrating.