Summation of the main points with explanation to get a better grasp of what it is trying to say.
Real gross domestic product (GDP):
After rising at an 8.2 percent annual rate in the third quarter of 2003, the fastest in almost 20 years, real gross domestic product (GDP) continued to increase in the fourth quarter, up at a solid 4.0 percent pace. With the exception of the third quarter, that was the strongest rate in seven quarters. Growth in the fourth quarter was widespread across almost all components of real GDP, a favorable condition for future growth.
Real personal consumption expenditures rose at a 2.6 percent rate, in line with the average gain in the five quarters prior to a 6.9 percent surge in the third quarter of 2003. That surge was affected by the start in july of lower tax withholding rates on individual income and the disbursement of advance rebates of an increased child tax credit; these provisions were contained in the Jobs and Growth Tax Relief Reconciliation Act (JGTRRA). These changes as well as provisions to stimulate business capital spending helped to spur the economy in the third quarter and raise the prospects for growth going forward. Business investment in equipment and software rose at a 17.6 percent pace in the third quarter and continued to grow at a strong 10 percent pace in the fourth quarter. Investment in inventories also contributed to real GDP growth in the fourth quarter as businesses became more optimistic about the sustainability of aggregate demand and began to rebuild depleted stocks.
Residential investment remained strong in the final quarter of the year, growing at a 10.6 percent pace after rising 21.9 percent in the third quarter. Favorable mortgage interest rates helped lead to near-record levels of new home sales and housing starts in 2003, boosting real residential investment in the second half of the year. The foreign trade sector was also a positive factor in the second half as exports grew much faster than imports, resulting in a smaller trade deficit. In the fourth quarter, exports rose at a strong 19.1 percent rate while imports grew at an 11.3 percent pace. The rise in exports was almost twice as fast as in the third quarter and the largest in 7 years.
In early December 2003, the Bureau of Economic Analysis introduced benchmark revisions to the data in the National Income and Product Accounts, in some cases extending back many years. In the Profile of the Economy section of the Treasury Bulletin, figures affected include GDP and all its components, disposable personal income and consumer spending, productivity, and net national saving and investment.
Growth of Real GDP:
Inflation:
Inflation at the consumer level continued at a moderate pace in 2003, but there was some acceleration at the producer price level. The consumer price index (CPI) rose 1.9 percent during the year, down by one-half percentage point from the 2.4 percent pace recorded during 2002. Energy price increases slowed, to 6.9 percent from 10.7 percent in 2002. The cost of food was up by 3.6 percent last year, more the twice the 1.5 percent pace in the previous year. "Core" inflation (prices excluding food and energy) continued to slow during 2003, decelerating to a very low 1.1 percent pace from 1.9 percent during 2002. That represented the smallest annual increase since 1960.
At the producer level, finished goods prices rose by 4.0 percent last year. This followed a modest 1.2 percent increase during 2002. Rising energy costs and higher food prices contributed to the overall acceleration. Energy prices rose by 11.5 percent, close to the 12.3 percent increase registered in 2002. Wholesale food costs were up by 7.7 percent after dipping slightly in the prior year. Core prices increased by a modest 1.0 percent but this followed a slight decline during 2002. Further back in the production chain, the pace of core intermediate materials price increases accelerated modestly from 1.5 percent in 2002 to 2.1 percent in 2003.
There continues to be little or no pressure on prices from rising labor costs. Hourly compensation costs (including stock options) as calculated in the national income accounts for the private nonfarm business sector increased by 3.3 percent during 2003. This was well below the 5.3 percent rise in productivity, yielding a 2.0 percent drop in unit labor costs. Unit labor costs fell by 2.4 percent across the four quarters of 2002. The employment cost index (ECI) for total compensation, a fixed-weighted compensation measure that does not account for stock options, increased by 3.8 percent during 2003, boosted by a surge in benefit costs. This was up a little from a 3.4 percent increase in the previous year.
Consumer Prices
Producer Prices - Finished Goods
Employment and unemployment:
The improvement in the labor market that began late in the summer of 2003 continued into early 2004. The unemployment rate has retreated from a 9-year high of 6.3 percent in june 2003 to 5.6 percent in January 2004.
Nonfarm payroll employment rose by 112,000 in January on top of increases totaling 254,000 in the prior 4 months. The 5-month string of job gains was the best since the recession began in March 2001. Employment growth recorded since the August trough has been concentrated in the private service-producing sector, with particularly noteworthy advances in professional and business services, education, health services, and leisure and hospitality. Hiring in the construction industry has also strengthened recently. Manufacturing payrolls have continued to shrink and in January contracted for a 42nd straight month. The pace of decline has slowed sharply, however, suggesting that an end to the downtrend in factory payrolls is near. About 3 million factory jobs have been lost since july 2000.
The unemployment rate edged down by 0.1 percentage point from December to 5.6 percent in January. The jobless rate declined by 0.7 percentage point from its cyclical peak of 6.3 percent in june 2003, and in January 2004 was at its lowest point in two years.
The apparent recovery in labor demand has not yet translated into stronger wage growth. Over the 12 months ended in January, average hourly earnings of nonfarm production workers rose just 2.0 percent-among the smallest year-over-year increases since 1987. Growth in earnings adjusted for inflation slowed to 0.2 percent over the 12 months ended in December (latest available) from 0.6 percent in the year-earlier period.
Unemployment Rate
Payroll Employment
Real disposable personal income and consumer spending:
Personal income in nominal terms grew by 3.7 percent across the four quarters of 2003. This followed increases of 2.4 percent in each of the previous 2 years. Wages and salaries, which account for more than half of personal income, grew at a 2.6 percent rate, or twice the 1.3 percent pace in 2002. Supplements to wages and salaries, which consist of employer contributions for pension and insurance funds and for government social insurance, grew by 5.7 percent during 2003 following an increase of 4.5 percent during 2002. Personal interest income declined but dividend income remained strong during 2003. Personal current transfer receipts, which include transfer payments from the government, grew by 6.5 percent last year, off a little from 6.8 percent in the previous year.
Disposable (after-tax) income adjusted for inflation rose by 3.2 percent during 2003 on top of a 3.5 percent gain during 2002. Inflation-adjusted disposable income was boosted last year by lower marginal tax rates and advance payments of the child tax credit legislated in the Jobs and Growth Tax Relief Reconciliation Act of 2003, which was reflected in an annual rate increase of 6.3 percent in the third quarter.
Real consumer spending picked up last year, increasing at a 3.8 percent rate. This followed a 2.8 percent gain during 2002. The pace accelerated from 2.5 percent at an annual rate in the first quarter of 2003 to a strong 6.9 percent in the third quarter. The latter benefited from the boost in disposable income from the tax package. Growth in the fourth quarter slipped back to an annual rate of 2.6 percent. Consumer spending last year rose at a faster rate than aftertax income, pushing the personal saving rate down to a very low 1.5 percent by the fourth quarter. For the entire year, the saving rate stood at 2.0 percent, down from 2.3 percent during 2002.
Industrial production and capacity utilization:
Industrial production showed continuing signs of strength in the latter part of 2003. Output from factories, mines, and utilities rose by a solid 6.2 percent at an annual rate in the fourth quarter, the fastest pace since mid-2000. Production increased for the fifth time in the past 6 months in December, edging up 0.1 percent. Output increased 2.3 percent in the latest 12 months.
Manufacturing production, which accounts for more than 83 percent of all industrial output, increased 0.3 percent in December, following a 1.0 percent jump in November. Factory output advanced by a strong 6.6 percent at an annual rate in the fourth quarter on top of the 3.7 percent gain posted in the third quarter. Production of motor vehicles and parts increased at a 6.8 percent annual rate in the fourth quarter, representing a pullback from the strong 19.3 percent increase in the third quarter. Vehicle and part production rose 0.6 percent in December. Apart from automobiles, manufacturing output rose 5.1 percent in the fourth quarter following a small 0.4 percent advance in the third quarter. Production in the high-technology industries (computers, communications equipment, and semiconductors) jumped by more than 33 percent at an annual rate in the third and fourth quarters, marking the strongest advance for this category in 3 years. Both the computers and office equipment sector and semiconductors accounted for the sharp gains in both quarters. Although communications equipment remains the least strongest segment of the high-technology group, it advanced by 12.3 percent at an annual rate in the fourth quarter after falling 6.7 percent in the third quarter. Nondurable manufacturing rose by 2.5 percent at an annual rate in the fourth quarter, the strongest quarterly gain since mid-2000. Chemicals and apparel and leather accounted for much of the rise. Production at utilities, which accounts for almost 10 percent of total industrial output, rose by a 5.5 percent annual rate in the fourth quarter after a 6.8 percent rise in the third quarter. Output at mines (the remaining 7 percent of industrial output) rose a solid 3.0 percent at an annual rate in the fourth quarter.
The capacity utilization rate for the industrial sector ended 2003 at 75.8 percent, up from june's two-decade low of 74.0 percent but still 5.5 percentage points below the long-term average of 81.3 percent. Capacity utilization ranged between 82 and 85 percent in the 1994-1999 period. Capacity utilization in the manufacturing sector was 74.5 percent in December, 5.7 percentage points below its long-term average of 80.2 percent. Utilization in the high-tech industries has been on the rise lately and increased to 68.9 percent by the end of 2003, the highest reading since mid-2001. That is still well below its long-term average of 79.2 percent.
Nonfarm productivity and unit labor costs:
Productivity continues to advance at a very impressive pace. Nonfarm business productivity (real output per hour worked) rose 2.7 percent at an annual rate in the fourth quarter following a blistering 9.5 percent gain in the third quarter. Over the most recent four quarters, labor productivity rose by 5.3 percent, well above the already rapid 3.1 percent annual pace averaged since 1995. This provides further evidence of an accelerated "New Economy" trend in recent years, compared to the 1973 through 1995 period, when productivity growth averaged only 1.4 percent per year.
Hourly labor compensation rose by 1.3 percent at an annual rate in the fourth quarter and by 3.3 percent during the past four quarters. Unit labor costs remain contained due to the strong growth in productivity. Unit labor costs fell at a 1.3 percent rate in the fourth quarter and were down 2.0 percent over the latest four quarters. The year 2003 marked the second year in a row with falling unit labor costs, the first back-to-back yearly declines in post-World War II history.
Productivity in manufacturing advanced by a 4.8 percent annual rate in the fourth quarter and was up by a strong 5.2 percent over the most recent four quarters.
Hourly compensation in manufacturing advanced by 1.5 percent at an annual rate in the fourth quarter and by 4.3 percent over the past four quarters. However, continued productivity gains have controlled unit labor costs. These costs fell at a 3.1 percent pace in the fourth quarter and were down 0.9 percent over the latest four quarters.
International transactions:
The current account measures trade in goods and services as well as the flow of investment income and unilateral transfers (including government grants and pension payments, and private transfers to and from foreigners). The current account has been in deficit almost continuously since the early 1980s but has fluctuated widely over time. Steady growth of the trade deficit since late 2001 pushed the current account deficit to a record high of $556 billion at an annual rate (5.2 percent of GDP) in the first half of 2003. However, subsequent improvement in the trade balance combined with a sharp rise in the surplus on investment income and a decline in unilateral transfers caused the current account gap to recede in the third quarter to $540 billion (4.9 percent of GDP).
The current account is, by definition, matched by offsetting transactions in the capital and financial accounts, with any difference in the recorded flows listed as a statistical discrepancy. Capital account transactions, which mainly consist of debt forgiveness and wealth transfers associated with immigration, are typically small and in the second quarter fell to $3.2 billion at an annual rate from an outsized $6.2 billion in the prior quarter.
The financial account measures transactions that alter the foreign financial assets and liabilities of the United States. Net financial inflows slowed sharply in the third quarter to $493 billion at an annual rate from $600 billion in the second quarter. The pullback was due in part to a steep fall in net foreign purchases of assets in the United States to $513 billion at an annual rate, about half the prior quarter's $1,051 billion pace and the lowest volume of financial inflows since the third quarter of 2001. Foreign holdings of non-Treasury securities plunged, reflecting a sell-off of U.S. equities and federally-sponsored agency bonds and a decline in acquisitions of corporate bonds. Net foreign purchases of U.S. Treasuries and foreign direct investment in the United States also slowed in the third quarter, but foreign official purchases remained strong. U.S. purchases of assets abroad also dropped in the third quarter to $20 billion at an annual rate from an average annual pace of $428 billion in the first half of 2003. A large decline in U.S. banks' claims on foreigners accounted for much of the decline.
Exchange rate of the dollar:
The dollar's trend lower from a peak in February 2002 continued throughout the fall and early winter. In the 23 months between that peak and January, the nominal exchange value of the dollar relative to a broad index covering the currencies of 26 important U.S. trade partners has depreciated by 13.1 percent. This decline follows a period of sustained appreciation that saw the dollar's value surge by 12 percent between December 1999 and February 2002.
The decline has been a function mainly of dollar weakness against the seven currencies of the United States' major trading partners, including the euro area countries, Japan, Canada, the United Kingdom, Australia, Sweden, and Switzerland. Since February 2002, the exchange rate of the dollar compared to an index of these currencies has fallen by 24.6 percent. Dollar depreciation against the yen and the euro, whose combined weights account for roughly 55 percent of the major index, has been largely responsible. Over the same period, the dollar/euro exchange rate fell by 31.1 percent and the dollar/yen exchange rate fell by 20.5 percent, reflecting U.S. current account deficit concerns, brighter prospects for growth in Europe, indications that U.S. monetary policy would remain very accommodative, and despite strong growth in the U.S. economy and strong performances in U.S. equity markets.
The dollar remains relatively strong compared with the currencies of many other important trading partners, although the pace of its appreciation in the most recent months has slowed somewhat. Since February 2002, the exchange value of the dollar compared to an index of currencies that includes Mexico, China, Brazil, and seven other Asian countries has appreciated by 3.4 percent. Since December 1999, this index has risen by 10.4 percent.
Interest rates:
The Federal Reserves monetary stance remains extremely accommodative. Since 2000, the Federal Open Market Committee has reduced the federal funds rate (the rate that banks and other financial institutions charge each other for overnight loans) 13 times, for a total of 5.5 percentage points, to 1 percent, its lowest level since 1958.
In the Treasury market, interest rates of all tenors eased substantially between 2000 and spring 2003. From a level above 6 percent in late 2000, the 3-month Treasury bill rate has declined almost steadily, and has remained below 1 percent since june 2003 (and in some weeks, has edged below 0.9 percent). The 10-year Treasury yield trended downward from above 6.5 percent in early 2000 to less than 3.25 percent in june 2003. Thereafter, rates moved broadly higher, reaching slightly above 4.5 percent in early September. Since then, the 10-year yield has edged lower, fluctuating in a range of 4.0 percent and 4.3 percent as of January and early February.
Mortgage interest rates generally follow movements of the 10-year Treasury rate. The interest rate on a conventional 30-year fixed-rate loan fell from a monthly average peak of 8.5 percent in May 2000 to under 5.25 percent at mid-June and an annual average of 5.82 percent for 2003-lows not seen since the mid-1960s. Such exceptionally low rates boosted mortgage refinancings to record levels and helped free additional cash for consumption. The rate rose to an average of 6.25 percent in August, but has since edged lower in tandem with the general decline in 10-year Treasury yields, to an average of 5.74 percent as of January.
Corporate bond yields reflect movements in long-term Treasury yields as well as numerous other factors. Moody's seasoned Baa yield on corporate bonds reached a monthly average peak of almost 9 percent in May 2000. Since then, it has declined on trend, but has been buffeted by financial reporting scandals as well as perceptions of rising corporate and economic risks. More recently, the yield has declined on evidence of faster growth and rising corporate profits, reaching an average 6.47 percent in January. The spread between the Baa yield and the 10-year Treasury yield, a measure of investor risk appetite, increased to nearly 4 percentage points in late 2002, but has since narrowed sharply, to an average of 2.3 percentage points as of January.
Short-term Interest Rates
Long-term Interest Rates
Housing:
The housing sector turned in an exceptional performance in 2003, with several housing indicators rising to their highest levels in a generation. Sales of new single-family homes eased by 4 percent in the fourth quarter to an annualized rate of 1.109 million from a quarterly all-time high of 1.155 million in the third quarter. Even so, sales for the entire year set a new record of 1.087 million, surging nearly 12 percent past the previous high of 972,000 recorded in 2002. Resales of existing single-family homes also moderated in the final 3 months of 2003 from their third quarter peak, but for the entire year rose 9-1/2 percent to a new high of 6.099 million.
The remarkable performance of the housing market is due in large part to the low interest rate environment. The mortgage rate for a 30-year conventional fixed-rate loan crept up from a historically low 5.21 percent in late june to an average of 6.26 percent in the month of August, but eased back to an average of 5.88 percent in December. Demand for new homes was little affected by the modest increase in the mortgage rate as housing fundamentals remained favorable, including expansion of the home-buying population, the relative safety of housing as an investment, and continued home price appreciation. Refinancing activity slowed as rates rose, but many homeowners will continue to benefit from past refinancings through reduced monthly mortgage payments and a lower debt burden, factors that will continue to support consumer spending and the economy.
Strong demand for new homes triggered a jump in construction in 2003. Housing starts shot up by 37 percent at an annual rate in the fourth quarter to 2.040 million (also annualized). That helped lift starts for the entire year by 8-1/2 percent to 1.8 million, making 2003 the best year for homebuilding since 1978. Starts of single-family homes in 2003 totaled 1.499 million, the highest on record. Starts in the smaller and more volatile multi-family sector rose to 350,000, the highest since 1986.
Federal budget:
The Administration's Fiscal Year 2005 Budget projects that the Federal deficit will reach almost $521 billion in fiscal year 2004. That would be about $146 billion higher than the $375 billion deficit in fiscal year 2003 and a new record in level terms. However, in relation to the more than $11 trillion U.S. economy, the fiscal year 2004 deficit would be 4.5 percent of GDP, below or the same as shares reached in 6 of the past 21 years, including a peak of 6.0 percent in fiscal year 1983. The deficit is projected to shrink by $157 billion in fiscal year 2005 to $364 billion and continue to diminish each year through the rest of the forecast horizon, which extends to fiscal year 2009. The improvement stems from a growing economy and tight controls on outlays, particularly discretionary spending unrelated to defense or homeland security.
Receipts are projected to edge up 0.9 percent in fiscal year 2004 following a 3-year drop and thereafter grow by an average of about 8 percent a year through fiscal year 2009. Growth in outlays is projected to be 7.5 percent in fiscal year 2004, but then slow to less than half that pace in the next two fiscal years before rising about 5 percent on average in fiscal years 2007 to 2009. The budget calls for increases of 7 percent in defense spending in fiscal year 2005 and 10 percent for homeland security while growth in the rest of discretionary spending is held to 0.5 percent.
The economic projections underpinning the budget estimates show that real GDP grows 4.4 percent in calendar year 2004 on an annual basis compared to the 3.1 percent annual increase recorded in 2003. Growth is expected to taper over the succeeding years to 3.1 percent by 2009, the estimated potential rate of growth of the economy. The economic forecast is in line with the consensus of private sector analysts.
Debt held by the public was $3.9 trillion at the end of fiscal year 2003 and is projected to rise to $4.4 trillion by the end of fiscal year 2004 and to $5.8 trillion by the end of fiscal year 2009. As a percent of GDP, debt over the forecast horizon rises from 36.1 percent in fiscal year 2003 to 40.2 percent in fiscal year 2007, then recedes to 39.8 percent in fiscal year 2009 as deficits diminish and the economy continues to post solid growth. The 40.2 percent share is well below the more than 45 percent share that prevailed from the late 1980s through most of the 1990s and recent peaks of more than 49 percent in the mid-1990s.
Net national saving and investment:
Net national saving, the source of funds for new investment, fell to 1.3 percent of net national product (NNP) in the first three quarters of 2003 (latest available data) from 2.7 percent in 2002 and a recent high of 7.3 percent in 1998. (Net national saving and NNP exclude depreciation to replace worn-out or obsolete equipment, software and structures used in production.)
The decline in the net national saving rate in 2003 mostly stemmed from a widening in the Federal budget deficit from 2.6 percent of NNP in calendar year 2002 to 4.3 percent in the first three quarters of last year. The deficit largely reflected the effects of the recession and the need for spending on homeland security following the terrorist attacks in 2001. State and local government budgets also fell into a deficit of 0.1 percent of NNP in the first three quarters of 2003. Combined, the total public sector deficit was 4.5 percent of NNP in the first three quarters of last year and 2.6 percent of NNP in calendar year 2002. Even so, the current deficit is only a little above public sector deficits averaging 3.8 percent of NNP from 1982 to 1995.
In the first three quarters of last year, private saving was 5.8 percent of NNP, up from the 5.4 percent reached in 2002 but well above the rate of 3.6 percent in 2001, which was the lowest rate since 1938. Personal saving eased to 1.8 percent of NNP in the first three quarters of last year from 2.0 percent in 2002, but remained above the 1.4 percent recorded in 2001, which was the lowest in 50 years. Retained earnings of corporations rose to 3.9 percent of NNP in the first three quarters of last year from 3.4 percent in 2002 and 2.2 percent in 2001, reflecting the recovery in corporate profits.
Net domestic investment (by government and private industry in structures, equipment, software, and inventory) was at 7.0 percent of NNP in the first three quarters of last year, the same as in 2002. Net investment averaged over 91/2 percent from 1998 through 2000; nevertheless, the most recent rates of investment are higher than rates at 6 percent or below in 1991 and 1992. A large part of investment during the last decade was financed from abroad. The U.S. balance on current account swung from 0.3 percent of NNP in 1991 to -5.5 percent in the first three quarters of last year.
Net National Saving