FROM THE OFFICE OF PUBLIC AFFAIRS

Good evening.  It is a pleasure to speak to the Economic Club of Washington again, this time in my capacity as Treasury Secretary.  Thanks to former Senator George Mitchell for inviting me.

Tonight I’d like to provide an overview of where the U.S. economy stands, and where we see it heading.  We’ve seen a real turnaround this year, and the recovery is clearly solidifying.  But I would also emphasize that President Bush believes we have a lot more progress to make, especially with regard to employment.  His administration remains committed to economic policies that will sustain and bolster the kind of growth we saw last quarter.

First, consider our present situation.  Last week the Commerce Department reported that economic growth increased at a remarkable annualized rate of 7.2 percent in the third quarter.  That’s well above expectations and it’s the largest increase since 1984.  While it will be difficult to grow at quite that pace in the coming quarters, it seems clear that we have entered a new phase of economic expansion.

The signs of growth have been emerging since this spring.  Personal consumption increased in the second quarter, with help from automotive sales incentives and home mortgage refinancings.  Investment demand such as new orders and shipments of nondefense capital goods increased as well, and the recovery in real equipment and software investment that we saw in last three quarters of 2002 resumed in the second quarter of 2003.  The factors contributed to annualized real GDP growth of 3.3 percent in the second quarter.

These improvements point back to the passage of the President’s Jobs and Growth Act in May, which provided immediate support for the economy.  In July, withholding tables were revised to reflect reduced marginal tax rates on individual income, and the child tax credit checks went out in the mail.  The increase in bonus depreciation and quadrupling of the expensing limit for small businesses encouraged business investment.  The reduction in taxes increased households’ cash flow by an estimated $35 billion and spurred businesses to take advantage of enhanced capital expensing.  Dividend tax relief has had a positive effect on the markets, and enhanced families’ sense of financial well-being.  In fact, equity prices have climbed about 30 percent since mid-March, improving financing conditions for businesses, and adding to household net worth. 

In short, the Jobs and Growth Act had a major impact on our economy.  Total consumer spending grew at a 6.6 percent rate in the third quarter, the largest gain since 1997, and equipment and software investment surged at a 15.4 percent pace, the fastest since early 2000.  Production responded to the pickup in final demand in the last two quarters, and manufacturing output rose near a 3 percent annual rate.

This week, there has been additional evidence of a recovery in the manufacturing sector.  The Institute for Supply Management’s Purchasing Managers’ index for manufacturing jumped sharply in October to 57.0 – the highest since January 2000.  That’s the fourth consecutive monthly reading signaling an expansion in manufacturing.  ISM’s non-manufacturing index also rose in October to the second highest level in its six-and-a-half year history.  In addition, this week we saw that construction activity continues to be strong.

Much of the strength we saw in the third quarter is likely to continue.  In other words, this is not a fleeting glimmer – there is real muscle behind the growth trend.  One key factor is the extraordinary productivity growth of American workers.  The 3.9 percent annual rate of advance in nonfarm productivity since late 2000 has been the strongest of any comparable period in 30 years.  The 9 percent increase in nonfarm business output seen in last week’s GDP data suggests that another large productivity gain is in store for the third quarter. 

Productivity remains the foundation for higher standards of living in this country.  Productivity gains are starting to register as rising profits and cash flow for businesses, paving the way for further growth in business investment and hiring.  Small business optimism recently reached a record high level, according to the National Federation of Independent Business, and the Conference Board reported that confidence among large-company CEOs was the strongest in 11 years.  Improved business optimism is a first step in the revitalization of labor markets.

Boosted by the President’s jobs and growth plan, real disposable personal income is rising, up at a 3.8 percent annual rate in the first three quarters of the year.  That means more money in the pockets of average Americans.  Household and business balance sheets gained from low interest rates over the past few years, leaving those sectors in a good position to continue to spend.  Rates are still very low, and yield spreads are narrowing, enhancing prospects for investment.

Of course, the housing sector has also been an engine of growth through the past recession and recovery.  Homeownership has risen to a record 68.2 percent of households, an achievement of which the President is proud.  Housing continued to expand through the third quarter and construction starts and permits point to further growth in residential investment.   Simply put, this Administration has a stellar record on housing, and the Treasury Department remains deeply committed to the President’s housing goals. 

Overseas, economies appear to be improving, providing a growing market for U.S. exports.  Exports rose 9.3 percent at an annual rate in real terms in the third quarter, for the first quarterly gain in a year.  Production related to replenishing inventories should also contribute to growth.  Through the past few quarters inventories have fallen to very low levels as businesses met a relatively large portion of demand out of existing stockpiles.  That is expected to turn around with the revival of strong demand.

Recent consensus forecasts expect real GDP growth to of about 4 percent in the fourth quarter and maintain close to that pace through next year.  That rate is above the estimated potential rate of growth of the economy, and the sustained trend above potential should lead to a pickup in employment.

We have already seen signs of a budding upturn in labor markets, with payroll jobs growing by 57,000 in September -- the first job increase in eight months.  The Conference Board’s latest consumer confidence survey found the assessment of both current and future employment conditions was more upbeat, contributing to a 4-point increase in the confidence index in October.   

Professional forecasters expect that the acceleration in real growth in the third quarter and over the following four quarters will lead to a sizable increase in employment. 

Though positive signs are emerging and the outlook is favorable, it appears to be taking longer for labor markets to respond to the upturn in economic activity.  Creating new jobs is a top priority for this Administration, and President Bush recently unveiled a six-point plan to reduce barriers and uncertainties that may impede businesses from hiring additional workers. 

The plan includes a series of measures to help the economy operate more efficiently.

First, we are working to make health care more affordable and its costs more predictable, so employers can add new workers without also adding a large and uncertain burden from health care costs.  We need to create an environment where health care spending is focused on providing high quality, high value care.

Second, we are working to prevent frivolous lawsuits from diverting money from job creation into legal battles.  We also intend to ensure that when necessary lawsuits proceed, the settlements are paid to the victims, not the trial lawyers.

Third, we are working to build a more affordable, reliable energy system that can support the expansion of our economy.

Fourth, we are streamlining regulations and needless paperwork requirements that reduce business productivity and deter growth.

Fifth, we are opening new markets to high value American products and bringing down prices for American consumers through trade agreements.

And sixth, we are working to make tax relief permanent, so businesses and families alike can plan for the future with confidence.

The economy is growing and the outlook is bright.  But President Bush and this Administration will not be satisfied until every American looking for work can find a job. We are continuing to work to spur job creation and reduce the barriers to achieving our economy’s greatest potential.

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