The recession that began with the burst of the technology bubble in March of 2001 officially ended eight months later. But economic growth has been slow, in part because of the September 11th terrorist attacks on the U.S. and a series of corporate accounting scandals. During the past two years, more than two-and-a-half-million workers have lost their jobs.
Rutgers University's Michael Bordo's assessment of the the U.S. economy reflects the mixed view of many analysts.
"One thing is that the stock market is turning around," he says. "And that's usually a leading indicator of future recovery. The thing that's still a little slow and is a little worrisome is that investment is not rising as quickly as some people had thought, maybe because of the size of the shocks that we took in the last few years. The economy is going to take a bit more time for investment to come back."
But that may be changing. Last quarter, business investment rose by nearly 7% -- the strongest showing in nearly three years. Companies are spending to replace worn out or obsolete equipment. But most economists point out that there hasn't been a resurgence in business investment across the board.
Many analysts believe that when the Federal Reserve -- the U.S. Central Bank -- lowers interest rates, that sparks investment and stimulates economic growth. That has been the Fed's strategy, lowering rates 13 times during the past two years.
But according to Marc Miles -- Director of the Center for International Trade and Economics at The Heritage Foundation here in Washington -- that may be counter-productive.
"If you walked into a store and wanted to buy a coat, for example, and I said: 'Sure, I'll sell this to you. But next week, you can get it for 20% off.' Would you buy a coat today or would you wait a week to buy a coat?" he asks. "Obviously, you have an incentive to wait. And if you think the Federal Reserve is going to continue to lower rates, you're going to put off your purchases, your investments, what ever it is you're considering, until you can get a better deal. So if the Fed would just come out and say, 'OK everybody, the cut in rates is over,' I think we would see the growth rate of the economy jump up to about the 4% level."
According to Marc Miles, President Bush's tax cuts will be more important than interest rate cuts in jump-starting the economy. Government borrowing and budget deficits will be offset by tax cuts that will stimulate business development, broaden the tax base and ultimately increase federal revenues.
But not all the experts agree. Most analysts do agree, however, that what has played a key role in keeping the economy afloat has been the effect the Federal Reserve's interest rate cuts have had on home mortgage and consumer credit rates. Consumer spending on homes, cars and other items has been one of the few sources of economic growth during the past two years.
"The big problem is not the consumer," says economist Ken Goldstein of The Conference Board in New York. "We've been in stasis for a-year-and-a-half, out of recession, but not really in recovery. Not because the consumer hasn't been spending money, but because businesses investment has been so weak. And the only real benefit for business out of the total package of tax cuts is the ability to increase depreciation -- in other words, to write-off the investment a little faster. So in terms of where the economy really needs stimulus, most of the tax cuts fall in a different area."
"The error that Washington is making is to think of this as a normal kind of episode that requires stimulus on the consumer side," says Edward Leamer, an economist at the University of California at Los Angeles and Director of the Anderson Forecast, which provides economic and business projections for the United States.
"On the contrary, we already had consumers who were over spending, not under spending," he says. "We have very low savings rates, particularly when you think about the retirement bulge that's going to occur in 2010. We're going to have a huge increase in retirees from about 12% of our population to more than 22% in a 20 year period of time. We need to grow the economy to afford all of those retirement benefits. But we can't do that unless we save. We have low savings rates. Washington doesn't seem to recognize that. And they've created stimulus packages -- both the Federal Reserve with its low interest rates and the Bush administration through its tax cuts -- that are encouraging overspending, which is OK for now. It helps out a little bit now. But it's going to create big problems for us later on."
During the mid-1980's, President Ronald Reagan enacted sweeping federal tax cuts that helped revive an ailing U.S. economy. And many analysts believe the same strategy will work again.
But Conference Board economist Ken Goldstein warns that tax cuts today won't be a replay of two decades ago.
"In the 1980's, we ran them at the federal level against [budget] surpluses at the state and local levels," he says. "What's going on now is that we're not just running [federal budget] deficits at least as large, if not larger, than the worst of the 1980's, but we're doing it against a backdrop of both tax increases and spending cuts at the state and local level and in some cases, like in California, in a very severe situation. So the total fiscal picture -- federal, state and local -- is less stimulative right now than it was in the 1980's, and we're going to pay for this, big time, down the road."
Another aspect of the U.S. economy that concerns many analysts is the nation's unemployment rate, which is running at more than 6%. Most of the job losses have been in manufacturing. And many of those jobs have gone overseas, perhaps never to return.
With about 65% of the U.S. economy now consisting of service sector industries, analyst Ken Goldstein wonders whether globalization could ultimately threaten America's economic strength.
"We've seen manufacturing jobs move out of the United States for at least three decades. We're starting to see some service jobs -- some of the phone banks and some of the web [i.e., Internet] processes -- move out of the United States. So one question is if services are also moving abroad, are we going to go back to being an economy where we face the prospect of just flipping each other's hamburgers?"
But "[m]arkets adjust rather quickly," says economist Marc Miles of The Heritage Foundation.
"If you go back to the 1950's, there was a very similar argument as there is today," he says. "In those days, it was called 'automation.' People were afraid that machines were going to replace workers and jobs. And what people failed to see at the time was that: yes, that was occurring, but at the same time, because of the machines, all kinds of new jobs were being created -- technical jobs, jobs revolving around software, computers, et cetera. I understand right now that as the the change is occurring, it's hard to see exactly where we're going. But I would bet that not in a generation, but somewhere in the next five-to-ten years people will begin to see that and say: 'Oh my gosh, we've developed all kinds of new jobs; there are all kinds of new opportunities that weren't open to us before.'"
There's little doubt that economic globalization will continue to shape America's future. As poor nations develop into industrial societies, most analysts say that countries like the United States will experience intensive growth -- relying on human capital for economic development.
But many economists warn that achieving major and sustained growth may be difficult. Modern middle class America is based on relatively unskilled manufacturing jobs. Transforming the United States into a post-industrial society that relies on a highly educated work force could take decades.
For now, most analysts are optimistic that business investment and consumer spending will fuel between 3 and 4 % economic growth with low inflation for the next few years.