U.S. December Business Economic Update

A Return of Goldilocks?
‘Not too hot…not too cold…just right.' This familiar refrain fashioned from the tale of Goldilocks conjures up images of steaming porridge, but it could just as well describe the current state of the economic expansion in the U.S. We project that the U.S. economy will grow 3.9% in 2004, just a shade above the 3½% we estimate as the sustainable trend rate of growth. With the unemployment rate at 5.4% and the labor force participation rate well below its recent peak, and with capacity utilization at only 76.9% of capacity in manufacturing, it is probably fair to say there is still some slack in the U.S. labor and product markets. Modestly above-trend growth of GDP on the order we project will encourage sufficiently rapid growth of employment to nudge the unemployment rate lower over the next year or so and encourage a gradual rise in capacity utilization. In this sense, modestly above-trend growth is “just right'— it will gradually remove slack in the labor and product markets without sparking an unwelcome rise in inflation.

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