April 29, 2004

April 29, 2004 | WebMemo on Economy

First Quarter GDP: Above Average Again

The U.S. economy grew at an inflation-adjusted annual rate of 4.2 percent in the first quarter of 2004, according to Bureau of Economic Analysis numbers released today. The report shows that the economy heated up slightly from 4.1 percent growth in the fourth quarter of 2003. Personal consumption, defense spending, and business investment-mostly on equipment and software-contributed heavily to the quarter's strong growth. Today's numbers may well presage strong employment growth in coming months, and they are just the latest evidence of the power of the President's tax cuts, which will begin to expire soon without action from Congress.

 

Expansion Continues

Today's GDP numbers show that the U.S. economy is in a period of sustained growth. This is the third quarter in a row that GDP growth exceeded the historical average of the past 20 years. (Annualized growth was 8.2, 4.1, and 4.2 percent, respectively, in Q3, Q4, and Q1)While the economy may not reach heights like the 8.2 percent that it did in the third quarter of 2003, the current GDP growth rate is heartening. It shows that the economic expansion, boosted by the 2003 tax cuts, continues unabated. Recent employment growth reflects the economy's above-trend performance, and today's advance report on the first quarter's economic activity promises strong employment growth over the next several months.

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The contribution of business investment to today's numbers is significant. Flat business investment was a major reason of why economic growth was so anemic, or even negative, from the summer of 2000 to third quarter of 2003[1]. Business investment had declined for nine straight quarters from 2001 to 2003. The 2003 tax bill helped spark economic growth by decreasing the tax on capital used by businesses and by allowing companies to immediately write-off a larger proportion of their expenses. As a result, business investment has increased by 7 percent or more in each of the last four quarters. Now business investment adds to GDP growth instead of subtracting. For the first quarter of 2004, business investment added .73 percent to GDP; compared that to the first quarter of 2003, when business investment reduced GDP by .06 percent.

 

The benefits of stronger business investment are evident in healthy personal income growth. Inflation-adjusted personal income rose by 5.6 percent in the first quarter of 2004, compared to 4.7 percent growth in the fourth quarter of last year. After-tax income increased dramatically, as well. Disposable personal income rose by $155.4 billion in the first quarter, compared to $31.6 billion in the fourth quarter. These improvements reflect a stronger labor market, lower personal taxes, and larger refund checks.

 

Robust Trends

When assessing the current state of the economy, it is important to look at the trend as well as the most recent numbers. Today, both signal a robust economy. The substantial growth in business investment has placed new and better equipment in the hands of workers who, in turn, have significantly increased their productivity. Consumers sense the promise of stronger, more productive economic activity and continue to make important long-term purchases, such as homes and automobiles. In short, the key economic indicators, from durable goods to manufacturing output, remain strong. While some analysts may hope for splashier numbers, the fundamentals of the U.S. economy are solid. The first quarter GDP numbers point to a strong year for the U.S. economy and, quite possibly, the strongest real GDP growth since 1999.

 

Rea Hederman, Jr., is Senior Policy Analyst in, and William Beach is Director of, the Center for Data Analysis at The Heritage Foundation.



[1] Rea Hederman, "Tax Cuts Boost Business Investment," Heritage Foundation WebMemo No. 412.

About the Author

Rea S. Hederman, Jr. Director, Center for Data Analysis and Lazof Family Fellow
Center for Data Analysis

William W. Beach Director, Center for Data Analysis and Lazof Family Fellow
Center for Data Analysis

Related Issues: Economy