NCPA - National Center for Policy Analysis

Strengths of The U.S. Economy

December 9, 2002

The stock market may be shaky, but the American economy is a lot healthier than some analysts perceive it to be.

  • Consider that gross domestic product has grown 3.2 percent this year -- roughly the post-World War II average.
  • U.S. output exceeds the combined output of Japan, the U.K., Germany, France and China.
  • Inflation has averaged 2.1 percent -- which is half the post-war average.
  • Unemployment is 6 percent -- compared to 6.5 percent since 1970.

Nevertheless, the stock market fell 40 percent since the summer of 2000 and corporate profits for companies in the S&P 500 dropped 27 percent over the last year.

Some economists attribute the weakness in profits to increased competition from abroad. They also point to the role of the Internet in lowering barriers to entry in sectors such as book and computer retailing and removing the lucrative friction from transactions like obtaining mortgages or buying machinery. Finally, deregulation has ended the government's protection of monopolies in areas such as telecommunications.

These developments are good for consumers, but can be bad for individual businesses that fail to get out of their rut and innovate. Many are responding by trimming operating costs -- a smart move. But others have also cut back on capital expenditures, which observers call a big mistake. In a more competitive era of hard-won profits, more research and development and capital spending are necessities, economic observers warn.

Source: James K. Glassman (American Enterprise Institute), "'Invest, Innovate, or Die,'" Wall Street Journal, December 9, 2002.


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