The United States enjoyed continued strong growth with low and stable inflation in 1999, extending the current expansion while continuing to build up the budget surplus.

GDP GROWTH RATE

Real gross domestic product (GDP) grew 4.2 percent from 1998 to 1999, marking the 8th consecutive year of positive output growth. Strong growth continued in the first quarter of 2000 as real GDP grew 4.8 percent at an annual rate.

Real personal consumption expenditures grew a robust 5.3 percent in 1999, exceeding 1998¡¯s 4.9 percent growth rate, and accounted for over 80 percent of real GDP growth. Favorable economic performance helped fuel strong household spending. Real disposable personal income grew 4 percent and the stock market continued to soar, with the Wilshire 5000 ending the year up 22 percent, and measures of consumer confidence reached all-time highs. Stocks were somewhat volatile over the first four months of 2000; nevertheless, consumer confidence remained high and real household spending grew a robust 7.6 percent at an annual rate in the first quarter of 2000.

Real investment grew 5.8 percent in 1999, down from the double-digit growth rates recorded in 1997 and 1998. Real business fixed investment grew 8.3 percent over the year, fueled by large increases in spending on computers and other information processing equipment, while spending on business structures fell. Real residential investment surged 7.4 percent in 1999, in part reflecting relatively low mortgage rates as well as rising wealth. Residential investment continued its strong growth over the first quarter of 2000, but forward-looking indicators suggest a slowdown in the coming months.

Real net exports exerted a drag on GDP growth in 1999 for the fourth year in a row. Real exports began to pick up in the second half of 1999 as foreign economies began to rebound and rose 3.8 percent for the year. But to satisfy growing domestic demand, real imports grew even faster at 11.7 percent.

INFLATION

Broad price measures showed a slight pick-up in inflation in 1999 from the very low pace in 1998. The chain-weighted price indexes for GDP and PCE increased 1.4 percent and 1.6 percent respectively on a year-over-year basis, both up slightly from their year-earlier rates. The consumer price index (CPI) rose 2.2 percent in 1999, up from 1.6 percent in 1998, but dramatic increases in energy prices accounted for all of this acceleration. Core measures of inflation, which exclude volatile food and energy prices, were even more subdued. Core PCE inflation was 1.4 percent on a year-over-year basis in 1999, up only 0.1 percentage point from 1998, while the core consumer price index actually showed a slow-down in the rate of inflation, increasing 2.2 percent in 1999, 0.2 percentage point less than its year-earlier rate.

EMPLOYMENT

The high-pressure U.S. labor market continued its strong performance in 1999 as nearly 2.5 million private non-farm jobs were created. Federal government payrolls fell for the seventh straight year. The service sector added 1.4 million new jobs in 1999, an increase of nearly 4 percent. In contrast, employment in the manufacturing sector, which was particularly hard hit by weak export demand, fell for the second straight year.

The annual unemployment rate dipped to 4.2 percent, its lowest level since 1969. These labor market gains were widely shared as Hispanic and African-American unemployment rates both dropped to historic lows.

The participation rate ¨C the percentage of the population over age 16 that is either employed or looking for work ¨C remained at its all-time high of 67.1 percent for the third straight year.

Strong productivity growth in 1999 helped to keep wage inflation in check despite the very low unemployment rate. Unit labor costs increased only 1.7 percent on a year-over-year basis in 1999. Meanwhile, output per hour in the non-farm business sector rose 3 percent and helped to support real wage gains of 3.7 percent.

TRADE ACCOUNTS

The current account deficit grew to $339 billion in 1999, or 3.7 percent of GDP. The balance on goods and services was $268 billion, as a merchandise trade deficit of $347 billion was partially offset by a services surplus of $80 billion.

EXCHANGE RATE

The US dollar held fairly steady in real terms against a broad trade-weighted worldwide average of other currencies in 1999. The exchange rate rose slightly over the first quarter of 1999 before retracing its steps over the last few months of the year. In the first four months of 2000, the dollar strengthened steadily, bringing the exchange rate up to levels not seen since mid-1998.

FOREIGN DIRECT INVESTMENT

In 1999, U.S. direct investment abroad was $152 billion while foreign direct investment into the United States was $283 billion.

FISCAL POLICY

The Federal Government ran a surplus (on a unified budget basis) for fiscal year 1999 of $124 billion, compared with $69 billion in 1998. This marked the first time in over 40 years that the Federal Government has recorded two consecutive budget surpluses. At 1.4 percent of GDP in 1999, the fiscal surplus was the largest relative to the size of the economy in nearly 50 years.

MONETARY POLICY

Amid concern over the potential buildup of inflationary imbalances, the Federal Reserve raised the target Federal funds rate by 75 basis points in three steps over 1999, fully reversing the rate cuts it had instituted in 1998 during the global financial crisis. Over the first six months of 2000, the Fed raised rates three times, stating that the near-term risks are weighted mainly toward conditions that may generate heightened inflation.

MEDIUM TERM OUTLOOK

The economy¡¯s remarkable performance has continued into the new millennium. As of June, this business cycle expansion has lasted 111 months. The small increase in inflation this year was largely due to the surge in world oil prices.

As of late July 2000, the consensus of private forecasters now expects growth to slow to 3.5 percent annual rate in the final three quarters of 2000. If this business/private sector consensus comes to pass, the growth rate for the year as a whole will be 4.8 percent, the same as the Administration¡¯s projection in its Mid-Session review. The private-sector consensus expects GDP to decelerate to 3.3 percent annual rate of growth for 2001 as a whole. The Administration expects a similar deceleration, to 3.2 percent.

Both supply- and demand-side considerations argue for some moderation in real GDP growth from its rapid 4.4 percent annual pace of the past twelve quarters. The unemployment rate has fallen about 0.4 percentage point per year over this period, indicating that this growth rates is well above its potential. The labor market is very tight as indicated by low unemployment in June and increases in real wages. It is doubtful whether a further decline of the unemployment rate could be accommodated without inflationary consequences. Labor force growth has not kept up with demand in the past two years, nor can it be expected to keep up with growth at such a pace in the future. Finally, some components of demand that contributed to the rapid growth of the past few years, such as business demand for capital goods, are not those likely to be sustainable over the long run.

The U.S. Administration projects U.S. long run GDP growth at about 3.0 percent per year through 2006. This rate is consistent with growth for the 1990 business cycle as a whole and with labor force growth of approximately 1 percent and labor productivity growth of approximately 2 percent.

STRUCTURAL REFORMS

In 1999, the passage of the Gramm-Leach-Bliley Act (GLB) markedly changed the way in which financial institutions meet the needs of the American people. This act updates the rules that have governed financial institutions since the great depression and relaxes prohibitions on affiliations among banks, security firms and insurance companies. By allowing banks to merge with other financial institutions, GLB aims to stimulate competition, increase consumer choice and reduce costs for consumers, communities and businesses. The act also provides protection of consumer privacy and encourages banks to meet the credit needs of under-served communities.

USA: OVERALL ECONOMIC PERFORMANCE