Economic Report of the President 1994 - The American Presidency ...

gradually overtake spending growth over the next couple of years,leading to a slowly increasing saving rate.Finally, foreign economies should recover over the next couple ofyears and provide an export lift for U.S. firms. By early 1995, netexports should once again be contributing to U.S. growth ratherthan subtracting from it. Strength in these sectors is expected tomore than offset the continued declines in real Federal spendingthat are expected over the next 5 years.The projected decline in the Federal budget deficit, from 4.0 percentof GDP in fiscal 1993 to about 2.3 percent of GDP by fiscal1996, should have benefits for the economy that go beyond interestrates. First, with less government "crowding out," more funds willbe available for private business investment. This higher investmentlevel will increase the Nation's capital stock and hence increaseits long-run potential output. Second, there is a linkage betweenthe Federal budget deficit and the current account deficit.Because foreign savings have been steadily flowing into the UnitedStates to cover the imbalance between domestic saving and domesticinvestment, we have been running large capital account surpluses.These in turn have required large current account deficits,because the two accounts are mirror images. A steady reduction ofthe Federal budget deficit, therefore, should also translate intosmaller current account deficits.With these developments, GDP growth of 2V2 percent to 3 percentper year—in line with 1993 growth—seems likely to continueover the rest of the 1990s (Table 2-2). This growth should be sufficientto reduce the unemployment rate steadily from the roughly6V2-percent level of late 1993 to about 5V2 percent (under the oldunemployment definition) by the end of 1998. (Box 3-1 in Chapter3 contains a discussion of the relationship between the old unemploymentrate, based on the historical Current Population Survey,and the new unemployment rate, based on the revised version ofthe survey.) These gains will be paired with healthy increases inreal disposable income, which are as important as job growth to theAmerican worker. After two decades of relative stagnation, realwages should post solid gains and allow American families onceagain to enjoy steadily improving living standards.Within this macroeconomic environment, short-term interestrates are likely to drift slowly upward over the coming years as theeconomy strengthens. Long-term interest rates are not expected toincrease appreciably, however, because inflation should remainsubdued and budget deficits will continue to shrink. Healthy gainsin productivity, the mainspring of rising living standards, will bethe key to keeping inflation tame. The higher rate of business investmentin the 1990s than in the 1970s and 1980s should keepproductivity on a relatively fast track and prevent unit labor costs91