In the fourth quarter of 2003, America's economy grew at an annualized rate of 4.0 percent, the Commerce Department reported today, continuing the pattern of strong growth from earlier in the year. After arresting the 2001 recession in its tracks, the administration's tax cuts are now pushing national output to new heights. Far from slowing down, real GDP rose to $10.6 trillion, another all-time high (see chart), and growth was significantly higher than the 3.2 percent average rate of the past ten years.
Driving the fourth quarter performance was continued strong investment, which increased at an annualized rate of 12.4 percent, double the historical rate. Coming on the heels of 14.8 percent annualized investment growth in the third quarter, the economy is clearly on the crest of an investment-driven boom. Booming investment is strong evidence in favor of the 2003 tax cut, which had as its centerpiece a sharp rate reduction on capital gains and dividends and was enacted immediately prior to the third quarter GDP acceleration.
Exports also played a significant role in the quarter's growth, increasing at a 19.1 percent annualized rate. This surge indicates renewed vigor in America's manufacturing sector and strong demand for U.S. products overseas. The declining exchange rate is the presumed cause of rising exports, and the dollar's continuing decline may mean even more exports in the months ahead.
- Real GDP grew at an annualized rate of 4.0 percent during the fourth quarter, significantly faster than the 10-year average of 3.2 percent.
- The U.S. real Gross Domestic Product (GDP) at the end of 2003 is 4.3 percent higher than in the fourth quarter of 2002. Economic expansion occurred in every quarter of 2003, but the bulk happened during the final two quarters.
- Investment is the main driver of GDP growth this quarter, which at 12.4 percent is more than double investment's 10-year average growth of 5.7 percent. This implies that the 2003 dividend and capital gains tax cuts are creating the right incentives for supply-side expansion, not just a short-term consumption stimulus.
- Exports grew by 19.1 percent, double the import growth rate, and quadruple the 10-year average. This is the second-fastest quarterly expansion in 15 years.
- Consumption grew by 2.6 percent, a slower rate than usual. Disposable personal income is essentially unchanged.
- Government spending expanded a full percent more slowly than in the last quarter.
- Prices increased by 1.9 percent in 2003, slightly faster than last year. Inflation, however, remains historically low.
It would be a mistake to consider the fourth quarter's growth rate a slowdown, as it far exceeds Europe's recent performance, exceeds our own historical average growth, and represents an expansion of the productivity frontier rather than mere recovery. Lowering taxes on capital and entrepreneurship in mid-2003 is having a predictable effect. Credit should go to the Bush White House and to the 108th Congress for loosening the reins on the productive side of the U.S. economy.