U.S. economic performance relative to other group of seven (G-7) members.

Youssef, Michael

Economic Growth

The real gross domestic product (GDP) of the United States--the output of goods and services produced in the United States measured in 1996 prices--increased at an annual rate of 4.0 percent in the fourth quarter of 2003, compared with 8.2 percent growth in the third quarter, according to advance estimates by the U.S. Department of Commerce, Bureau of Economic Analysis. (2)

The deceleration in real GDP growth in the fourth quarter of 2004, primarily reflected decelerations in personal consumption expenditure, in equipment and software and in residential fixed investment that were partly offset by an upturn in inventory investment, and an acceleration in exports. Imports which are a subtraction in the calculation of GDP increased.

Real personal consumption expenditures, increased by 2.6 percent down from an increase of 6.9 percent in the third quarter. Of this expenditure category, durable goods purchases increased by only 0.9 percent, down from an increase of 28.0 percent in the third; and nondurable goods increased by 4.4 percent, down from an increase of 7.3 percent in the third quarter. Services expenditure increased by 2.1 percent compared with an increase of 2.8 percent in the third quarter. Real nonresidential fixed investment, increased by 6.9 percent in the fourth quarter down from an increase of 12.8 percent in the third quarter. Nonresidential structures decreased by 3.0 percent, compared with an increase of 1.8 percent in the third quarter; equipment and software, increased by 10.0 percent down from an increase of 17.6 percent in the third quarter; and real residential fixed investment increased by 10.6 percent down from an increase of 21.9 percent in the third quarter. In contrast, real exports of goods and services increased by 19.1 percent in the fourth quarter up from 9.9 percent increase in the third quarter; and real imports of goods and services, increased by 11.3 percent up from an increase of 0.8 percent in the third quarter.

Real federal government consumption expenditures and gross investment played a less pronounced role in the GDP rise in the fourth quarter of 2003, increasing by only 0.7 percent compared with an increase of 1.1 percent in the third quarter of 2003.

The price index for gross domestic purchases, which measures prices paid by U.S. residents, increased by 1.0 percent in the fourth quarter of 2003 compared with an increase of 1.8 percent in the third quarter. Excluding food and energy prices, the price index for gross domestic purchases increased by 1.1 percent in the fourth quarter of 2003, compared with an increase of 1.8 percent in the third.

Gross Domestic Product for 2003

In 2003, real GDP increased by 3.1 percent following an increase of 2.2 percent in 2002, reflecting the impact of increases in its major contributors: personal consumption expenditures, federal government spending, equipment and software, residential fixed investment, and exports and imports. Personal consumption expenditure increased by 3.1 percent compared with an increase of 3.4 percent in 2002. Real nonresidential fixed investment increased by 2.8 percent following a decline of 7.2 percent in 2002. Equipment and software increased by 5.2 percent compared with a decline of 2.8 percent in 2002. Exports of goods and services increased by 1.9 percent compared with a decline of 2.4 percent. Imports of goods and services--a subtraction from GDP-increased by 3.7 percent following an increase of 3.3 percent in 2002. The price index for gross domestic purchases increased 1.9 percent in 2003, compared with an increase of 1.4 percent in 2002.

Measured from the fourth quarter of 2002 to the fourth quarter of 2003, real GDP increased by 4.3 percent in 2003, compared with an increase of 2.8 percent in 2002. The price index for gross domestic purchases increased by 1.6 percent during 2003, compared with an increase of 1.7 percent during 2002.

In other G-7 economies, the annualized rates of real GDP growth were as follows. In the United Kingdom, the economy grew by 3.8 percent in the fourth quarter of 2003, and it grew by 2.5 percent in the year through the fourth quarter of 2003. In Germany, the economy grew by 0.9 percent in the third quarter but grew by 0.2 percent in the year through the fourth quarter of 2003. In Japan, the economy grew at a brisk rate of 7.0 percent in the fourth quarter and by 3.6 percent in the year through the fourth quarter of 2003. In Italy, the economy grew by zero percent in the fourth quarter, but grew by 0.1 percent in the year through the fourth quarter of 2003. In France, the economy grew by 2.0 percent in the fourth quarter of 2003, but grew by 0.5 percent in the year through the fourth quarter of 2003. In Canada, the economy grew by 1.1 percent in the third quarter of 2003, but grew by 1.0 percent in the year through the third quarter of 2003. For EU members linked by the euro currency, the euro area (EU-12) GDP grew by 1.2 percent in the fourth quarter of 2003, but grew by 0.6 percent in the year through the fourth quarter of 2003.

U.S. Corporate Profits

The U.S. Department of Commerce in their GDP news release for the third quarter of 2003, reported that U.S. corporate profits increased substantially in 2003 compared with 2002, causing a substantial increase in corporate cash flows and the internal funds available for corporate investment. (3) Profits from current production (corporate profits with inventory valuation and capital consumption adjustments) increased by $101.4 billion in the third quarter of 2003, following an increase of $95.7 billion in the second quarter. Current production cash flow--that is, internal funds available to corporations for investment--increased by $77.2 billion in the third quarter, compared with an increase of $86.1 billion in the second. Domestic profits of financial corporations increased by $19.6 billion in the third quarter of 2003, compared with an increase of $11.2 billion in the second. Domestic profits of nonfinancial corporations increased by $72.6 billion in the third quarter, compared with an increase of $84.7 billion in the second. In the third quarter of 2003, both real gross corporate product and profits per unit of real product increased. The increase in unit profits reflected an increase in the prices corporations received and a decrease in unit costs, both unit labor and nonlabor costs.

The foreign component of profits--rest-of-the-world component of profits--increased by $9.2 billion in the third quarter of 2003, in contrast to a decrease of $0.2 billion in the second. This measure is calculated as (1) receipts by U.S. residents of earnings from their foreign affiliates, including dividends received by U.S. residents from unaffiliated foreign corporations, minus (2) payments by U.S. affiliates of earnings to their foreign parents, including dividends paid by U.S. corporations to unaffiliated foreign residents. The third quarter 2003 increase was accounted for by a larger increase in receipts than in payments.

Profits before tax with inventory valuation adjustments is the best available measure of industry profits because estimates of the capital consumption adjustment by industry do not exist. This measure reflects the depreciation-accounting practices for inventory and depreciation used for federal income tax returns. According to this measure, profits before tax increased by $73.4 billion in the third quarter of 2003, in contrast to a decrease of $16.5 billion in the second.

Industrial Production

The Federal Reserve Board reported that U.S. industrial production rose 0.8 percent in January 2004, following a revised increase of zero percent in December 2003. Total output was 2.4 percent higher in January 2004 than its level in January 2003. Manufacturing output climbed 0.3 percent in January. Mining output increased by 0.1 percent, and output at utilities rose 5.2 percent. The index for the rate of capacity utilization for total industry increased in January 2004 to a level of 76.2 from 75.6 (0.8 percent) in December 2003, although it increased by 1.1 percent over January 2003.

By market group, the output of consumer goods rose by 0.8 percent in January, following a decrease of 0.4 percent in December 2003, and grew by 0.8 percent in the year from January 2004 to January 2003. The output of business equipment rose by 0.5 percent and rose by 3.3 percent in the year to January 2004. The output of information processing equipment rose by 0.5 percent, but showed a gain at an annual rate of 5.2 percent from its January 2003 level. The output of industrial materials rose 0.9 percent in January 2004. The output of durable materials advanced 0.8 percent, and that of nondurable materials was unchanged. The output of energy materials rose by 2.0 percent.

Other G-7 member countries reported the following growth rates of industrial production. For the year ended December 2003, the United Kingdom reported a 0.8-percent decrease, France reported a 2.0-percent increase; Germany reported a 3.5-percent increase, and Japan reported a 5.7-percent increase. For the year ended November 2003, Italy reported a 0.2-percent increase, and Canada reported nil increase. The euro area reported an increase of 1.2 percent for the year ending November 2003.

Prices

The seasonally adjusted U.S. Consumer Price Index increased by 0.2 percent in December 2003 following a decline of 0.2 percent in November, and was unchanged in October 2003 following increases of 0.3 percent in each of the preceding two months, according to the U.S. Department of Labor. For the year ended December 2003, consumer prices increased 1.9 percent. During the year ended in January 2004, prices increased by 1.2 percent in Germany, by 2.2 percent in Italy, and by 1.4 percent in the United Kingdom. During the year ended in December 2003, prices increased by 2.0 percent in Canada, by 2.2 percent in France, but prices decreased by 0.4 percent in Japan. Prices increased by 2.0 percent in the euro area in the year ended January 2004.

Employment

The U.S. Department of Labor, Bureau of Labor Statistics, reported that the U.S. unemployment rate trended down to 5.6 percent in January 2004, virtually unchanged from the previous months. Job losses have lessened in manufacturing, and unemployment has trended up in construction and several services industries. In other G-7 countries, the latest unemployment rates were reported to be 7.4 percent in Canada, 9.7 percent in France, 10.2 percent in Germany, 8.4 percent in Italy, 4.9 percent in Japan, and 4.9 percent in the United Kingdom. The unemployment rate in the euro area was 8.8 percent.

Productivity and Costs

U.S. labor productivity increased in the fourth quarter and the full year of 2003. Productivity growth has held down business costs and inflation and raised standards of living. The U.S. Department of Labor, Bureau of Labor Statistics, reported that preliminary U.S. labor productivity data--measured as output per hour of all persons--rose in the fourth quarter of 2003 by 1.8 percent in the business sector as output increased by 3.7 percent and hours worked increased by 1.9 percent. In the nonfarm business sector, productivity rose by 2.7 percent as output increased by 4.2 percent and hours worked rose by 1.5 percent. In the manufacturing sector, productivity rose in the fourth quarter of 2003 by 4.8 percent as output grew by 6.6 percent and hours worked grew by 1.7 percent. In the durable goods manufacturing sector, productivity soared--rising by 6.4 percent as output grew by 10.2 percent and hours worked grew by 3.6 percent--and in the nondurable goods manufacturing sector, productivity increased by 3.8 percent, output increased by 2.6 percent, but hours worked declined by 1.1 percent.

On an annual average basis, productivity rose 4.3 percent in the business sector and 4.2 percent in the nonfarm business sector in 2003. In manufacturing, productivity grew by 4.3 percent. Hours worked in manufacturing--which includes about 15 percent of U.S. business sector employment--tend to vary more from quarter to quarter than data for the aggregate business and nonfarm business sectors.

The data sources and methods used in the preparation of the manufacturing series differ from those used in preparing the business and nonfarm business series, and these measures are not directly comparable. Output measures for business and nonfarm business series are based on measures of gross domestic product prepared by the U.S. Department of Commerce, Bureau of Economic Analysis. Quarterly output measures for manufacturing reflect indexes of industrial production prepared by the Federal Reserve System, Board of Governors. Table 1 shows U.S. productivity and costs measures in the fourth quarter. Table 2 shows annual average changes of productivity growth during 1994-2003. It is worth noting that productivity almost doubled in 2002 and 2003 over previous years as number of hours worked declined in the business and nonfarm business sectors, as well as in manufacturing. In manufacturing, output declined in 2002 and rose slightly in 2003 despite the large decline in hours worked.

Forecasts

The U.S. economy has continued to grow at a remarkable rate, according to the Council of Economic Advisers (CEA), Federal Reserve Board, International Monetary Fund (IMF), Organization for Economic Cooperation and Development (OECD), and major private forecasts. Despite such forces as the lengthy adjustment of capital spending following several years of decline in equity values, economic retrenchment triggered by revelations of corporate malfeasance, and the heightened political risks in areas such as the Middle East, U.S. real GDP grew by 2.4 percent in calendar 2002. In 2003, the U.S. economy continued growing at a strong rate of 8.2 percent in the third quarter, and 4.0 percent in the fourth quarter of 2003. In 2003, the U.S. economy grew at 3.1 percent. Forecasts point to a recovery taking hold across the OECD area following periods of fits and starts of world economic growth.

U.S. Administration Forecast for Long-Term Growth and Productivity

The economy continues to display supply-side characteristics favorable to long-term growth, according to the Administration's annual Economic Report of the President to the Congress produced by the President's Council of Economic Advisers. (4) The CEA report emphasized that productivity growth has been remarkable, and inflation remains low and stable. As a result of stimulative fiscal and monetary policies, real GDP is expected to grow faster than its 3.1 percent potential rate during the next four years.

The Administration forecasts that real GDP growth will average 3.7 percent at an annual rate during the four years from 2003 to 2007. The unemployment rate is projected to stay flat. In 2004, real GDP growth is projected to grow by 4.0 percent, then decelerate to 3.4 percent in 2005, to 3.3 percent in 2006 and 2007, and to 3.1 percent in 2008 and 2009. The GDP price deflator would slow to 1.2 percent in 2004, rise to 1.4 percent in 2005, 1.6 percent in 2006, 1.8 percent in 2007, and 2.0 percent in 2008 and 2009. Unemployment rate would decline to 5.6 percent in 2004, 5.4 percent in 2005, 5.2 percent in 2006, and 5.1 percent over 2007 to 2009.

OECD Forecast for the Industrialized Countries

Economic forecasts by the Organization of Economic Co-operation and Development (OECD) in its December 2003 Economic Outlook (5) show a strong momentum has finally taken hold across the OECD area following a drawn-out period of fits and starts. The turn for the better stems from a variety of factors such as the steadying of the geopolitical environment that has allowed oil prices to stabilize and business confidence to strengthen. In the United States, the economy has recovered benefitting from strong productivity gains, the stimulus provided by monetary and fiscal policies, and high-potential investment growth. Japan's economy has shown a marked and better-than-expected improvement due to better investment prospects in the manufacturing sector and fast growing markets in other Asian economies. The OECD forecast states that the most likely scenario for the next two years is one of sustained growth in the United States and progressive recovery in Europe and Japan, underpinned by a prolonged period of low inflation, monetary ease, and moderate long-term interest rates.

The OECD forecasts U.S. real GDP to grow by 4.2 percent in 2004, and by 3.8 percent in 2005. In contrast, Japan's real GDP is projected to grow by 1.8 percent both in 2004 and in 2005. In the euro area (EU-12), real GDP is projected to grow by 1.8 percent in 2004, and by 2.5 percent in 2005. In the larger area of the European Union (EU-15), real GDP is projected to grow by 1.9 percent in 2004, and by 2.5 percent in 2005. Real GDP for the whole OECD area--the world's industrialized economies as a group--is projected to grow by 3.0 percent in 2004, and by 3.1 percent in 2005.

Inflation is projected to remain subdued in the United States, rising by 1.2 percent in both 2004 and 2005. In Japan, deflationary price pressures are expected to remain throughout the 2-year forecast period, as prices are projected to decline by 1.3 percent in 2004, and by 0.8 percent in 2005. In the euro area, inflation is projected to slow from 1.7 percent in 2004 to 1.6 percent in 2005. In the European Union, inflation is projected to slow from 1.8 percent in 2004, to 1.7 percent in 2005. In the overall OECD area, inflation is projected to remain slow at 1.4 percent in 2004 and 2005.

Unemployment is projected to decline to 5.9 percent in 2004 and to 5.2 percent in 2005 in the United States. In Japan, unemployment is projected to stay at 5.2 percent in 2004, and 5.0 percent in 2005. In the euro area, unemployment is projected to remain high at 9.0 percent in 2004, and at 8.7 percent in 2005. In the European Union, unemployment is projected to hit 8.1 percent in 2004, declining slightly to 7.9 percent in 2005. In the total OECD area, unemployment is projected to remain around 7.0 percent, declining to 6.7 percent in 2004 and 2005, respectively.

The U.S. current-account deficit--as a percent of GDP--is projected to remain high over the two years, growing to 5.0 percent in 2004 and to 5.1 percent in 2005. In Japan, the current-account surplus is projected to grow from 3.6 percent of GDP in 2004 to 4.3 percent in 2005. In the euro area, the current-account surplus is projected to remain at its current 0.7 percent in 2004, and rise to 0.9 percent in 2005. The overall OECD current-account deficit, as a percent of GDP, is projected to remain at 1.3 percent in both years.

World trade volume--the average of world merchandise imports plus exports--is projected to increase by 7.8 percent in 2004, and by 9.1 percent in 2005, up from the much lower growth rate of 4.0 percent in 2003.

Michael Youssef (1)

myoussef@usitc.gov

202-205-3269

(1) Michael Youssef is an international economist in the Country and Regional Analysis Division, U.S. International Trade Commission, Office of Economics. The views expressed in this article are those of the author. They are not the views of the U.S. International Trade Commission (USITC) as a whole or of any individual Commissioner.

(2) Data for this article were taken largely from the following sources: U.S. Department of Commerce, Bureau of Economic Analysis, "Gross Domestic Product," BEA 04-04 series news release, found at Internet address http://www.bea.gov/beahome.html; Federal Reserve Board, "Industrial Production and Capacity Utilization," G.17 series news release, found at Internet address http://www.federal-reserve.gov/releases/G17/Current/; U.S. Department of Labor, Bureau of Labor Statistics, "Consumer Price Index," USDL-03 series news release, found at Internet address http://www.bls.gov/news.release/cpi.nr0.htm; U.S. Department of Labor, Bureau of Labor Statistics, "The Employment Situation," USDL-03 series news release, found at Internet address http://www.bls.gov/news.release/empsit. nr0.htm.

(3) U.S. Department of Commerce, Bureau of Economic Analysis, "Gross Domestic Product: Third Quarter 2003 (Preliminary) and Corporate Profits: Third Quarter 2003 (Preliminary)," BEA 03-45, Nov. 25, 2003, found at Internet address http://www.bea.gov/bea/newsrel/gdpnewsre-lease.htm, retrieved Nov. 25, 2003.

(4) Council of Economic Advisors, Economic Report of the President, February 2004 (GPO: Washington DC, 2004).

(5) OECD, Economic Outlook No. 74, Volume 2003/2, December 2003 (OECD: Paris, 2003).

Table 1 Productivity and costs: Preliminary fourth quarter 2003
measures, at seasonally adjusted annual rates

Sector Productivity Output Hours Hourly compensation

 Percent change from preceding quarter
Business 1.8 3.7 1.9 0.9
Nonfarm business 2.7 4.2 1.5 1.3
Manufacturing 4.8 6.6 1.7 1.5
 Durable 6.4 10.2 3.6 0.6
 Nondurable 3.8 2.6 -1.1 2.9

 Percent change from same quarter a year ago
Business 5.2 5.0 -0.2 3.3
Nonfarm business 5.3 5.2 -0.2 3.3
Manufacturing 5.2 1.8 -3.3 4.3
 Durable 7.2 3.9 -3.1 3.9
 Nondurable 3.1 -0.7 -3.6 5.0

 Real hourly compensation Unit labor costs

 Percent change from preceding quarter
Business 0.1 -0.8
Nonfarm business 0.5 -1.3
Manufacturing 0.7 -3.1
 Durable -0.3 -5.5
 Nondurable 2.0 -0.9

 Percent change from same quarter a year ago
Business 1.4 -1.8
Nonfarm business 1.3 -2.0
Manufacturing 2.4 -0.9
 Durable 2.0 -3.1
 Nondurable 3.1 1.9

Source: U.S. Department of Labor, Bureau of Labor Statistics,
"Productivity and Cost-Fourth Quarter 2003," release USDL 04-119, Feb.
5, 2004, found at Internet address
http://www.bls.gov/news.release/pdf/prod2.pdf, retrieved on Feb. 9,
2004.

Table 2 Annual average percent changes in productivity and related
measures, 1994-2003

Measure 1994 1995 1996 1997 1998 1999 2000 2001

 Annual percent change
Business
 Productivity 1.2 0.3 2.8 1.9 2.6 2.9 2.9 2.2
 Output 5.0 2.9 4.6 5.3 4.8 5.1 3.9 0.1
 Hours 3.8 2.6 1.8 3.3 2.2 2.1 1.0 -2.1
 Hourly compensation 1.6 2.2 3.2 3.2 5.9 4.8 7.0 4.1
 Real hourly -0.5 -0.3 0.5 1.1 4.4 2.7 3.5 1.3
 compensation
 Unit labor costs 0.4 1.9 0.5 1.3 3.2 1.8 4.0 1.8
Nonfarm Business
 Productivity 1.2 0.6 2.5 1.7 2.6 2.8 2.7 2.1
 Output 4.8 3.2 4.5 5.2 5.0 5.2 3.8 0.1
 Hours 3.5 2.6 1.9 3.4 2.3 2.3 1.1 -2.0
 Hourly compensation 1.7 2.2 3.2 3.1 5.8 4.7 7.0 3.9
 Real hourly -0.4 -0.2 0.5 1.0 4.3 2.5 3.6 1.1
 compensation
 Unit labor costs 0.5 1.6 0.6 1.4 3.2 1.8 4.2 1.7
Manufacturing
 Productivity 3.3 3.9 3.4 3.5 4.7 3.8 4.6 2.2
 Output 5.7 4.5 3.2 5.5 4.5 2.9 3.0 -4.6
 Hours 2.3 0.6 -0.2 1.9 -0.2 -0.9 -1.5 -6.6
 Hourly compensation 3.3 2.0 2.0 1.9 6.1 4.2 9.1 2.4
 Real hourly
 compensation 1.1 -0.4 -0.6 -0.2 4.6 2.1 5.6 -0.4
 Unit labor costs 0.0 -1.8 -1.3 -1.5 1.3 0.3 4.2 0.2

Measure 2002 2003

 Annual percent change
Business
 Productivity 4.8 4.3
 Output 2.3 3.7
 Hours -2.4 -0.6
 Hourly compensation 2.1 3.0
 Real hourly 0.5 0.7
 compensation
 Unit labor costs -2.5 -1.2
Nonfarm Business
 Productivity 4.9 4.2
 Output 2.3 3.7
 Hours -2.5 -0.5
 Hourly compensation 2.2 2.9
 Real hourly 0.6 0.6
 compensation
 Unit labor costs -2.5 -1.2
Manufacturing
 Productivity 6.8 4.3
 Output -0.6 0.1
 Hours -7.0 -4.0
 Hourly compensation 3.6 4.5
 Real hourly 2.0 2.2
 compensation
 Unit labor costs -3.0 0.3

Source: United States Department of Labor, Bureau of Labor Statistics,
"Productivity and Costs--Preliminary Fourth Quarter and Annual Averages
for 2003," USDL 04-119, found at Internet address
http://www.bls.gov/news.release/pdf/prod2.pdf, retrieved on Feb. 9,
2004.