Key Factors Indicate Recovery is Sustainable

COMMENTARY Budget and Spending

Key Factors Indicate Recovery is Sustainable

Dec 8th, 2003 3 min read

With glad economic tidings rolling in from all fronts, it's beginning to look a lot like . . . a recovery. Are we where we should be? No. But we're moving there at a remarkable pace. More jobs are available and fewer people are in the unemployment lines. And the evidence indicates that this crop of good news promises solid economic growth throughout next year and likely the year after that. The recession is finally behind us -- and now, fortunately, so is the slow growth that has marked the recent recovery.

The economy grew at a stellar 8.2 percent in the third quarter -- the best growth we've seen in nearly 20 years. Job growth has increased over the past four months, adding 328,000 new jobs. In related good news, the unemployment rate continued to decline, falling to 5.9 percent.

Why are we getting all this good news now? Many factors are involved, but we can't ignore the fact that the tax cuts Congress and President Bush approved this year are playing a major role. The "Jobs and Growth Tax Relief Reconciliation Act of 2003," it appears, was aptly named.

Spending a minor factor

Credit for the current spate of good news, incidentally, has less to do with consumer spending than many people realize. Such spending has helped sustain the economy throughout the recovery, but spending alone doesn't create jobs. The 2003 tax cuts built a foundation for the recovery by giving businesses incentives to expand and invest.

Tax relief has cut the cost of capital, making investment and expansion more attractive and allowing existing enterprises to operate more profitably. Plus, it's providing incentives for individuals to work, save and invest more.

The business activity we're seeing now flows directly from important pro-growth elements in the tax cuts that set the stage for increased entrepreneurial activity, investment and expansion.

Areas of growth

When the tax cuts were enacted, "supply side" economists predicted they would promote faster economic growth, job creation, a drop in unemployment and a marked increase in investment, not to mention improvement in the stock market. The numbers bear this out.

Yet the phenomenal economic performance of recent months has outpaced expectations of even the most optimistic forecasters. Four areas of growth in particular illustrate how lowering the cost of capital and investment provided the necessary underpinnings and show why the recovery is structurally sound and sustainable.

  • Business investment. It's grown significantly during the past six months and at the especially brisk pace of 14 percent in the past three months, which means that a crucial part of the economy has picked up steam and will continue to remain strong. High-tech investment is at a record high. Businesses don't invest in equipment unless they plan on producing more -- and to do that, they need more people. This is a critical signal that businesses are more confident and that they believe they can increase their activities without undue risk.
  • Business activity. It's strong for both the manufacturing and service sectors. Manufacturing activity is at its highest levels in 20 years, with new orders and production soaring. Equally important is strength in the service sector, which accounts for 80 percent of the economy and includes everything from financial, banking, health and legal services to retail and construction. The performance of both sectors indicate that the recovery is well under way and sustainable.
  • Business productivity. Productivity growth rose to 9.4 percent in the third quarter, a level not seen in 20 years. Here, too, manufacturing was especially strong. The fact that this good news is accompanied by job growth is especially significant. This tells us that businesses are working economically and efficiently and that demand is strong.

New jobs. With business investment and activity on the rise, job growth is falling smoothly into place. Employment is usually the last element of an economy to show improvement in a recovery. The 57,000 jobs added to the economy in November continued the upward trend of the past four months. With the unemployment rate at 5.9 percent, last year's bleak performance is being steadily erased.

As the economy climbs, so do corporate profits and tax liabilities. In fact, recent business revenues have been such that the taxes government at all levels collects from this income will surely be well above current projections throughout 2004. Higher tax revenues, in turn, translate into lower deficits at the federal level and improved fiscal health at the state level.

President Bush's pro-growth tax policies provide a strong foundation for continued economic growth -- not a one-time spurt, as some would have us believe -- by making investment and entrepreneurial risk taking more attractive and rewarding. Which suggests a great holiday present for next year -- making the tax cuts permanent.

Alison Acosta Fraser is director of the Roe Institute for Economic Policy Studies at The Heritage Foundation.

First appeared in The Atlanta Journal-Constitution