GDP Figures Imply Economic Stimulus Receding, But Recovery Still in Place
Jeff Lemieux
July 30, 2004

U.S. economic growth dropped to a 3 percent pace in the second quarter.  Rising gas prices no doubt crimped consumer spending.  More importantly for the long-run, the huge economic stimulus that helped spark a surge of growth last year is now receding.

Economic growth slipped into a lower gear in the second quarter, but the U.S. recovery is not in doubt.  Job growth has returned and prices are rising.  Economic growth now seems self-sustaining, even as the economic stimulus of rapidly rising federal deficits and ultra-low interest rates begins to recede.  Fears of an indefinite job recession or price deflation are now gone.

Moreover, business investment will probably remain strong throughout this year as companies accelerate projects into 2004 to take advantage of a tax break scheduled to expire in December.

Three percent growth is not bad -- in fact, the Congressional Budget Office (CBO) projects that "potential" output growth will be about 3 percent a year through 2009 (see Figure 1.)

Figure 1.

However, past economic recoveries have had faster growth and more rapid job creation.  If growth remains only so-so, workers expecting a more vigorous economic recovery may be disappointed in the growth of their paychecks.

Next year will be tricky.  Regardless of who wins the presidential election, Congress will be forced to address the budget deficit, which continues to rise in spite of a growing economy.  Spending must be trimmed and any additional tax cuts will have to be "paid for" with offsetting revenue increases or cuts in entitlement spending.

Fiscal discipline takes money out of the economy in the short run, but bolsters confidence among private businesses that an out-of-control budget won't harm long-term economic prospects. 

Business expectations and worries are an important reason why the economic recovery from the recession of 2001 has been so hesitant.  Some of those worries stem from terrorism and geo-political concerns.  But executives also know that the stimulus from government policy is only temporary -- the federal budget is out of control and something has to give.  Now that the economy is growing, we risk a sudden crisis of confidence and a surge in interest rates if fiscal discipline isn't restored.

The next president should host a bipartisan economic summit to end the budgetary gimmicks and re-instill a sense that the U.S. government has a firm grip on spending and a long-run plan to return to balanced budgets.

Links:
Centrists.Org Rising Health Costs Reduce Wage Growth (July 29, 2004)

Centrists.Org Inflation Shows Signs of Settling Down (July 16, 2004)

Centrist Policy Network Deficits for Stimulus Were OK.  But Now?  (July 14, 2004)

Centrists.Org Summer Economic Update -- Moderate Growth and Slowly Improving Labor Markets
(July 9, 2004)