../../../MY_DOC%7E1/MY_DOC%7E1/ECONNEWS/South-Western%20College%20Publishing%20-%20Economics  
Too Great Expectations?
Subject Economic Policy
Topic Productivity and Growth
Key Words Economic Growth, Inflation, Productivity, Unemployment
News Story

If an economist were to grade the economy's performance over the last year, the grade, based upon a number of economic data series, would probably be a B. If we were to look at forecasts of economic growth for this year and next, the grade would be even better. This evaluation is, however, inconsistent with the national mood. Consumer confidence has plummeted since early 2000, aided by the dismal performance of the stock market and the scandals plaguing corporate America. Unless the national mood changes, or some major event like war with Iraq occurs, the economy will likely muddle along.

Despite last month's increase in the unemployment rate to 6 percent, and the flat retail sales, the economy is forecast to grow by 3 percent in 2003. Inflation is low, productivity is strong and a 6 percent unemployment rate is lower than the jobless rate in the 1980s and early 1990s. Indicators of financial distress, like housing foreclosures, are relatively stable and consumer indebtedness is slowing. That's the good news. The bad news is that there is a lot of pessimism about the economy.

October and November economic data were weak, and there was considerable discussion of the possibility of a "double dip" recession. Reports of mounting budget deficits, deflation resulting from industry overcapacity and weakness in the investment sector diluted consumer confidence. Terrorism, the threat of a war with Iraq, and North Korea's nuclear program and the impact of these events upon the economy, were added sources of worry.

Many economists believe that the primary problem with the economy is its failure to meet consumer expectations. The late 1990s were characterized by significant economic growth and substantial run-ups in the stock market. Lots of people made lots of money. The recession of 2000 coupled with the terrorist attacks of September 11 changed all that. The economy is fundamentally sound, and as moderate growth continues, economists expect expectations to align with performance.



(Updated February 5, 2003)

Questions
1.

The Federal Reserve has cut interest rates 12 times in two years. The discount rate now stands at 1.25 percent, its lowest level in about 40 years. If interest rates have fallen, why has investment not increased?

2. There is concern that increased budget deficits will drive up interest rates and crowd out private investment. What is crowding out? Does increased borrowing by the federal government reduce borrowing in the private sector?
3. What is deflation? Why is deflation a source of concern for economic policy makers?
Source Alex Berenson, "This Testy Economy Refuses to Be Charmed," The New York Times, December 16, 2002.

Return to the Productivity and Growth Index

©1998-2003  South-Western.  All Rights Reserved   webmaster  |  DISCLAIMER