NCPA - National Center for Policy Analysis

Economic Growth Increases, But Investment Falls

April 29, 2002

The economy grew at a 5.8 percent annualized pace in the first quarter, the fastest in two years, but observers aren't ready to declare us out of the woods.

  • More than half the growth came from businesses increasing production because they emptied warehouses and cut inventories so much last year.
  • Without inventories, gross domestic product grew just 2.6 percent - not bad, but down from the fourth quarter's 3.8 percent pace.
  • The real problem, however, is the 5.7 percent falloff in business investment.
  • Despite the fact that that it's an improvement over the 12 percent average drop in the previous three quarters, it doesn't exactly presage major growth.

That, observers say, is the problem -- investment isn't just another part of the economy, it drives the economy. When investment falls for any prolonged period, trouble follows - just ask Japan.

During the late 1990s, it was easy to ignore investment as the stock market soared and business added equipment and software at a torrid pace. Now, it's different. One key gauge of investment optimism, initial public offerings, is down. And actual investment in plant and equipment by existing businesses has dropped for over a year.

In the future that means slower productivity, smaller wage gains and less output -- in short, a lower standard of living. One way to improve the situation, observers say, is to make the Bush tax cuts permanent, since permanent tax cuts boost growth twice as much coming out of a recession. Another is to cut capital gains and other taxes for small businesses and startups, which are key players in a recovery.

Source: Editorial, "Out Of The Woods?" Investor's Business Daily, April 29, 2002.


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