E C O N O M I C R E P O R T O F T H E P R E S I D E N T

The current expansion, by contrast, started with a large structural deficit andturned it around, to the point that there is now a structural surplus, as Federalspending has been kept in check while revenues have risen. Monetary policy,meanwhile, has been given the freedom to encourage real growth while keepinginflation low. Interest rates, as a result, have been lower than they would havebeen. Indeed, real interest rates in this expansion have been considerably lowerthan in the 1980s expansion. Using survey data to measure inflation expectationssuggests that real short-term interest rates have been about half what theywere in the 1980s expansion, and real long-term rates are about a third lower.Lower interest rates have stimulated investment spending, and this investmenthas, in turn, boosted capacity growth and raised productivity—two key factorsthat have helped keep inflation in check.Although the current account (the balance of trade in goods and services plusnet factor income and net transfers) moved into deficit in both the 1980s andthe 1990s, the forces behind these shifts were different. In the 1980s both netnational saving and net domestic investment declined as a percentage of GDP,so that foreign borrowing was used, directly or indirectly, to finance consumptionand Federal budget deficits rather than investment. In the 1990s, bycontrast, net national saving increased, and the capital inflow has helped financean investment boom.Key Features of the ExpansionDriven by technological advance, more open markets, and investment inphysical capital and human skills—all with the ongoing support of Federalpolicy—this expansion is on track to become the longest ever. In 1999, theninth year of the expansion, GDP grew by 4.0 percent, and 2.7 million payrolljobs were created. The expansion remained youthful-looking and vigorousdespite its chronological age. How did the engines of this expansion, justdescribed, translate their energy into such a sustained performance?Productivity GrowthThe start of an expansion is usually a period of rapid productivity growth.Companies set up factories and offices that are designed to produce a certaintarget level of output. In a recession, output falls below this target, plantsoperate less efficiently, and productivity falls. Companies may also retain valuedworkers that are not needed today but will be needed when the upturncomes, and this, too, lowers average productivity. The surge of productivitygrowth at the start of an expansion occurs as businesses are again able tomake better use of their workers and their physical capital.34 | Economic Report of the President