Economic Report of the President

Real GDP expanded by 3.7 percent during the four quarters of 2004, andby 4.4 percent for the year as a whole compared with 2003. The solid advancein real GDP during 2004 was supported by gains in consumer spending, businessfixed investment, and, to a lesser extent, housing investment, inventoryaccumulation, and government spending. Net exports (exports less imports)held down growth in all four quarters as the trade deficit rose in the thirdquarter to a record high as a percentage of GDP. Progress toward strengthenedeconomic growth among U.S. trading partners led to an increase in exports,but imports continued to outpace exports as U.S. domestic demand anddemand for imported oil remained strong. The economy’s strong growthperformance came about in the face of higher oil prices, which likely reducedgrowth somewhat during the year. The Administration expects real GDP togrow 3.5 percent during the four quarters of 2005, in line with the consensusof professional forecasters. This growth is expected to be driven by continuedgains in consumer spending, investment growth, and stronger net exports.The labor market strengthened during the year. The unemployment rate,which declined 0.5 percentage point to 5.4 percent by the end of 2004, isprojected to edge down further to 5.3 percent by the fourth quarter of 2005.Nonfarm payroll employment, which grew about 180,000 per month during2004, is projected to grow about 175,000 per month in 2005, in line withother professional forecasts.Inflation increased from the extremely low levels of 2003, partly because ofrapid increases in energy prices. Inflation as measured by the consumer priceindex excluding food and energy remained in the moderate 2 percent range,and inflation expectations remain low.The economy made these advances even as energy prices soared, the FederalReserve raised interest rates, and the demand-side effects of fiscal policy stimulusbegan to recede in the second half of 2004. This continued growthindicates that the economy has shifted from a policy-supported recovery to aself-sustaining expansion.Expansions Past and PresentChapter 2, Expansions Past and Present, compares the current economicexpansion to previous expansions. The current expansion and the previousone that started in 1991 followed especially shallow recessions, and bothexhibited relatively moderate overall growth in key economic variables.Shallow recessions typically are followed by shallow recoveries and deep recessionsby robust recoveries. The recent recession stands out in that there wereno consecutive quarters of decline, with revised data showing that real GDPdropped in the third quarter of 2000 and the first and third quarters of 2001,but grew in the intervening quarters.18 | Economic Report of the President