After a brief slowdown in growth at mid-year, triggered by high oil prices, the U.S. economy gained strength and grew by about four percent in 2004 as a whole.
Four percent growth is a significant pick-up from the three percent gain of 2003 and the 1.9 percent figure for 2002. Other economic indicators are similarly positive. The unemployment rate fell to 5.4 percent and two million new jobs were created. Inflation, despite a nearly 50 percent rise in oil prices, remained manageable at below three percent.
Even at mid-year the U.S. economy was deemed healthy enough so that the Federal Reserve, the U.S. central bank, felt it could begin to raise short-term interest rates from their lowest levels in over 40 years. Federal Reserve Board Chairman Alan Greenspan told Congress in July that a series of rate rises were in the works.
"Our economy appears to have prepared itself for a more dynamic adjustment in interest rates," he said. "Of course considerably more uncertainty, and hence risk surrounds an economy with a more rapid tightening of monetary policy than is the case when tightening is more measured."
The Federal Reserve pursued a measured tightening, raising short-term rates by one-quarter percent five times between June and December. Even with those increases, short-term rates remain at a still very low 2.25 percent.
While the U.S. economy proved resilient in absorbing an oil price that in October reached $55 a barrel, the dollar fell significantly on world currency markets. The 20 percent drop against the euro makes U.S. products cheaper in Europe while European goods cost more for Americans. When the U.S. Treasury failed to intervene to halt the dollar's slide, currency traders concluded that the Bush administration privately favored a weaker dollar, believing it would remedy a large and potentially destabilizing U.S. trade deficit. Central bank chief Greenspan in October called attention to the implications of a chronic trade deficit.
"This can not go on indefinitely," he said. "Because at some point we're going to reach a status where our net debt to foreigners - currently about a fourth of our gross domestic product - will get exceptionally large. And the holding of dollar assets abroad both for the public and private sectors abroad will become abnormally large relative to their needs. And they will stop purchasing dollars."
In early December it appeared former railroad executive John Snow would be asked to leave his job as treasury secretary. But after an awkward two weeks of silence, the president warmly praised Mr. Snow and asked him to remain the leader of his economic team. Mr. Snow says the administration is determined to cut the government's large budget deficit by half over the next few years.
"We're on a path to do that. We will do that," he said. "In fact, we're going to do better than that commitment. We're going to bring the deficit down to about 1.6 percent of gross domestic product, which is very low by historical standards."
Prior to the Bush tax cuts and the big spending increases for the war in Iraq, the U.S. government had registered budget surpluses for four consecutive years.