Looking for Support for Phase Two
Sunday, February 1, 2004; Page F02
Phase One of the U.S. economic recovery is pretty much complete: Sales and profits are back, companies are beginning to invest again, the bear market is over, consumers are confident, and unemployment is headed down, even if there aren't yet a lot of new jobs.
Now, what of Phase Two? That's what folks were wondering last week.
It wasn't just Friday's somewhat disappointing report on economic growth, which the government said fell from the annualized rate of 8.2 percent over the summer to 4 percent in the final quarter. Consumers began to pull back on their debt-soaked consumption binge even as corporations began to reinvest some of their recent profits in new equipment.
Then there was the subtle but important change in monetary policy. At its regular meeting, the Fed's policy committee decided to continue pumping up the economy with cheap money by leaving the federal funds rate at 1 percent. But at the same time, the committee slightly altered its guidance about future moves by striking from its communique the line suggesting that rates would remain low for a "considerable period." Analysts opined that the Fed wants the latitude to begin raising rates later this year if firms start to hire again and wages and prices show the first hints of inflation.
The next day, minutes of the previous Fed meetings revealed that its members were beginning to worry about the negative long-term effects of the large federal budget deficit. New estimates from the White House showed that, even with an improving economy, the government's red ink would exceed $500 billion next year, reflecting in part a big upward revision in the cost of a new Medicare drug benefit. The Congressional Budget Office, in its own analysis, found that the federal budget might never come into balance if Congress goes along with the president's request to make permanent the tax cuts they passed last year.
The problem, then, comes down to this: The economy can probably keep growing fast enough to create new jobs, but only if the Fed keeps rates at these historically low levels, which it will be reluctant to do if Congress doesn't make moves to fix the long-term budget problem by cutting spending or raising taxes, which is politically unlikely and in any case runs the risk of slowing economic growth in the short run.
That, in a nutshell, is the policy conundrum. And it helps explain why at this point no one is certain just what to expect in the next phase of this economic recovery.
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