For the past three and a half years, America has been the world’s fastest growing major industrial economy. Although the pace of growth has varied, advancement has been steady. Gross domestic product has continually trended upward, due in part to strengthening productivity and increases in efficiency. In fact, from 2000 to 2003, the pace of US productivity growth was the fastest in more than a half century. What can we expect for the next five years? Healthy economic growth.
Specifically, the US economy is forecast to see expansion in real gross domestic product (GDP) over the next 5 years at a pace of 3.47% per year. In terms of job growth, US gains are anticipated to be 1.46% per annum. Of particular note is strong projected expansion in defense, semiconductors, food processing, and building products, as well as industrial and transportation equipment. While manufacturing is highly important to America’s economy, service-related activities continue to play the dominant role in terms of the number of jobs.
America’s payrolls have seen steady increases during the past year with approximately 2.1 million jobs created. The unemployment rate has dipped to its lowest level in three years, even while the available workforce has gradually expanded. In excess of 139 million Americans are working today, more than at any other time in our history. Small businesses, which create about 70% of new jobs and generate over half of the nation’s economic output, are well positioned to flourish in the future.
Productivity has grown in every quarter since the second quarter of 2001, including several very impressive performances. These gains are expected to continue and will enable economic growth while maintaining price stability. The gains stem primarily from greater incorporation of technology and enhanced efficiency.
Consumers account for about two-thirds of all economic activity. While consumer confidence has faltered to some degree lately because of worries over such factors as rising energy prices and the war in Iraq, a general spirit of optimism still prevails. Thus, consumer spending is expected to remain steady for the near future.
The Consumer Price Index has shown some signs of moderation in recent months. Much of the upward pressure over the past year has been rooted in surging energy prices, although price increases have remained low by historical standards. The Fed’s rapid response to the hint of inflation earlier this year has reduced inflation fears; inflation is projected to remain low through the forecast horizon. Currently, the energy market is in turmoil amid political tensions in the Middle East and civil unrest in other oil producing countries. Oil prices will likely slide gradually below the $40 per barrel range (as an average price) over the next couple of years, though unexpected circumstances or lingering uncertainty could cause them to remain at a high level. Even so, the high cost of crude is not anticipated to derail the nation’s ongoing recovery.
Long-term interest rates have exhibited a downward trend in recent months. At the same time, short-term rates are moving upward, largely in response to actions by the Federal Reserve (Fed). This divergence is a positive sign for the economy, indicating confidence in the Fed’s ability to control inflation. Nonetheless, a modest upward trend in rates is expected as the substantial borrowing from the public sector competes for funds with expanding private credit demand.
Although improvement in the US economy is good news for equity markets, uncertainties related to oil prices and other factors have led to volatility in recent months. As these uncertainties ease, the underlying expansion of US business activity is expected to lead to growing corporate profits and better stock market performance.
While the outlook for the nation’s economy is generally sound, innovation will be an important key to the continued expansion of our economy. Indeed, with the ongoing march of technological achievements, it is evident that new ways of doing things have the potential to benefit the entire world. As technological advances emerge from various locations around the globe, the US must constantly seek ways to harness innovative energies and scientific breakthroughs and translate them into channels for business investments and economic return. Meeting this challenge is critical for the nation’s economic growth and development.