

	April 30, 2007 HP-374 Treasury Assistant Secretary for Economic Policy Phillip Swagel Statement for the Treasury Borrowing Advisory Committee of the Securities Industry and Financial Markets Association Washington, DC- Economic growth slowed at the start of 2007, but is expected to strengthen through the balance of the year to a sustainable pace. Core inflation appears to be contained and the labor market remains broadly healthy, with low unemployment, steady job creation, and ongoing wage gains supporting consumer spending. These developments provide a solid foundation for the economy and should support faster growth in the remainder of the year. Real GDP grew by 1.3 percent at an annual rate in the first quarter of 2007. Consumer spending remained strong but, as expected, residential construction subtracted about a full percentage point from growth. Business investment turned up following a late-2006 pullback, but the increase in capital outlays was offset by a slowdown in inventory accumulation and downturn in net exports. A decline in federal government spending reflected lower defense outlays in the first quarter of 2007. The decline in residential building activity has subtracted from GDP growth since late 2005. Although the residential sector remains weak, there are signs that the housing market is stabilizing. Housing starts have recovered modestly from the low levels recorded in the fall of 2006 and sales of existing single-family homes (over 80 percent of the one-family market) edged higher in the first quarter following little change in the fourth quarter. However, sales of new single-family homes continued to decline in the first quarter, and the overhang of both new and existing homes for sale remains substantial. Private analysts expect that declining housing activity will continue to act as a damper on growth at least through mid year. Thus far, the slowdown in housing activity does not appear to have had an appreciable impact on consumer spending, which accounts for about 70 percent of economic activity. Real personal consumption expenditures rose by 3.8 percent at an annual rate in the first quarter. Robust income growth has buoyed consumer spending, with real disposable personal income rose by 4.5 percent at an annual rate in the first quarter. Household balance sheets appear healthy, with household net worth reaching a new high in the fourth quarter of 2006, boosted by strong equity gains and rising real estate wealth. Steady job gains and a low unemployment rate have also lent support to consumption. Nonfarm payroll employment expanded by 180,000 in March and the job gains for January and February were revised up, bringing the net job gain for the first three months of 2007 to 455,000. Altogether, the economy has generated 7.8 million jobs, or 181,000 jobs per month on average, since the employment trough in August 2003. The unemployment rate dipped to 4.4 percent in March, matching the 5-1/2-year low recorded in October. Business investment turned up in the first quarter of 2007, with nonresidential fixed investment gaining by 2.0 percent at an annual rate in the first quarter after a decline at the end of 2006. Spending on equipment and software rebounded slightly and outlays for structures accelerated somewhat. There are signs that capital spending is poised to strengthen further in the coming quarters. New orders of core capital goods (non-defense capital goods excluding aircraft) rose in March, retracing about half of the two previous monthly declines. In addition, hiring and consumption are both solid, corporate profits as a share of GDP are near a 57-year high, and corporate balance sheets are healthy. The Administration's most recent economic forecast, prepared in November, projects 2.9 percent real GDP growth over the four quarters of 2007 – similar to the U.S. historical average over the last 20 years. The pace of economic activity is expected to pick up as the year progresses. Recent private forecasts call for growth of 2-1/2 percent during 2007, with the pace expected to accelerate throughout the year. Inflationary pressures remained broadly contained in the first quarter. Headline consumer price inflation rose by 2.8 percent over the twelve months ended in March, down from a 3.4 percent gain in the year-earlier period. Energy prices increased just 4.4 percent in the latest twelve-month period compared to year-over-year gains averaging 21 percent per month in the first half of 2006. Excluding both energy and food, core consumer prices advanced by 2.5 percent in the year ended in March, slower than the 2.9 percent gain posted over the year ending in September. In sum, the economy remains in transition but growth is expected to accelerate, returning to its long-term trend by the end of the year. The labor market remains firm and inflation appears contained.