The U.S. economy.

• Author: Witte, Willard E.

The U.S. economy during 2003 has been an exercise in cognitive dissonance. By most measures, the economy has performed quite well (and quite close to the outlook we presented a year ago). Yet the "man on the street" by most reports believes that things are not going well. In this national overview, I will first look at the good news from last year and dissect the fly in the ointment. Then I will outline our relatively optimistic view of what we can expect in 2004, along with some things that could cause problems during the next year.

Overall, output growth for 2003 will probably come in at about 3 percent, with growth accelerating in the second half of the year. Figure 1 shows the past six years of real output growth. At the same time, inflation has remained low (about 2 percent for consumer prices), and interest rates dropped at mid-year to levels not seen in over four decades. Household income, driven by rising labor productivity with a boost from the federal tax cut, has registered solid growth. Households have used this income (and funds from mortgage refinancing) to purchase nearly seventeen million new cars and trucks and push housing construction to an all-time high. Since the spring, clear signs of a sustained recovery in business investment exist, especially in the high-tech area. Even the stock market has had an up year.

[FIGURE 1 OMITTED]

During the past summer, the National Bureau of Economic Research--a Boston-based group of economists who arbitrate the beginnings and ends of recessions--declared that the "official" end of the recession occurred in November 2001. This means we are now two full years into the recovery period. Indeed, in terms of output, we are beyond recovery and into a new period of expansion.

Yet there is a continuing string of anecdotal evidence that Americans are apprehensive about the economic outlook. Central to this concern is the labor market. Figure 2 shows why. During the late 1990s, the economy was adding almost three million jobs each year. For the past two and a half years, job losses have averaged over a million each year. As of September 2003, total employment was nearly 2.6 million below its peak in early 2001. As a result, unemployment has risen steadily to above 6 percent. This is not high by historical standards, but it is far removed from the below 4 percent levels reached prior to the recession.

[FIGURE 2 OMITTED]

The situation in the manufacturing sector, an especially important part of the...