FROM THE OFFICE OF PUBLIC AFFAIRS

The economy continued to grow over the last three months but at a pace short of its potential.  Uncertainties regarding the war in Iraq, the related effects of higher oil prices, and an unusually severe winter restrained economic activity in the first quarter.  Last week’s advance report on first-quarter Gross Domestic Product showed that real GDP grew at a 1.6 percent annual rate.  Real consumer spending slowed a bit from the fourth quarter, and equipment and software investment, which had increased for three consecutive quarters, turned down.  Net exports made a positive contribution to real GDP growth for the first time in eight quarters, however, as the trade deficit narrowed. However, this was due to a decline in imports which more than offset a decline in exports.

The resiliency and flexibility of the U.S. economy, even during a period of war, led to the beginnings of a rebound in some economic indicators towards the end of the quarter.  In March, motor vehicle sales increased nearly 5 percent, returning to January’s 16.1 million-unit annual selling pace, and early evidence for April suggests another good gain.  Strengthening consumer confidence as worries about the war receded, as well as a 9 percent decline in retail gasoline prices since mid-March, provided evidence that the outlook for personal consumption expenditures is improving for the second quarter.  The housing sector continues to exhibit growth, with housing starts bouncing back as more seasonable weather returned.

Capital spending remains weaker than necessary to support a robust expansion.  However, corporate profits and net cash flow -- the internal funds available for investment -- both rose in the fourth quarter for the first time in a year, and earnings reports for the first quarter have so far been favorable.  Yield spreads have narrowed and corporate balance sheets are improving.  

While the economy continued to move forward in the first quarter and seems poised for further growth in the second quarter, the pace of the economic expansion and conditions in the labor market are receiving particular attention.  A decline in payroll employment in February was followed by an additional decline in March.  Weekly initial claims for unemployment insurance have been rising recently.  The need for the President’s jobs and economic growth package is now even more pressing than when it was announced on January 7.

The plan would provide across-the-board tax relief for individuals and accelerated relief from the marriage penalty for working couples, the effects of which would show up quickly in taxpayers’ paychecks.  Rebates from an increased child tax credit would also stimulate the economy in the near-term.  Lower tax rates would aid small business owners as well, many millions of which pay taxes at the top individual rate.  In addition, incentives for small businesses to invest and add jobs would be enhanced by the proposal to triple the amount they can write off on the purchase of new equipment, up to $75,000.  The proposal to end the double taxation of dividends is estimated to have very sizable impacts on growth, spurring the investment that is vital for the creation of new jobs.  The Administration estimates that by the end of 2004, real GDP will be 1.7 percent higher and the economy will generate 1.4 million more jobs with the package than without it.

In sum, while the economy has shown resiliency and has continued to grow, we need to shore up the rate of economic growth and create additional jobs.  The President’s plan will provide the impetus that is needed to meet these goals in both the short-run and over the longer term.