What is Influencing Economic Growth and Federal Spending?

Negative factors cited by the members included ongoing concerns about job security that were being sustained by a continuing stream of workforce reduction announcements by major business concerns, increased consumer debt burdens that were showing up in rising delinquency rates on some types of loans, and the apparent satisfaction of much of the earlier pent-up demand for consumer durables.

On the positive side, reduced interest rates, still readily available credit, and the accumulation of financial wealth from the sharp rise in stock and bond prices were seen as likely to support continuing gains in consumer spending.

Further increases in business fixed investment were viewed as a likely prospect for the year ahead, though the growth of such investment probably would be well below the strong pace experienced earlier in the current cyclical expansion. Anecdotal reports indicated continuing strength in nonresidential construction in some parts of the country, but declining rates of capacity utilization augured reduced growth going forward. The expansion of investment in producers’ durable equipment also was expected to slow, but from a pace that had seemed unsustainable.

While appreciable further growth could be expected in expenditures for high-tech equipment as business firms continued to focus on improving the efficiency of their operations in a highly competitive environment, spending for other types of equipment was likely to be sluggish. Members noted in particular the prospects for weaker business spending for motor vehicles, especially for heavy trucks. However, the fundamental determinants of investment in business equipment, including the reduced cost of financing such investment, remained positive and this sector of the economy should continue to provide considerable impetus to the expansion.

The members also viewed the considerable decline that had occurred in mortgage interest rates and the ample availability of housing finance as key factors in their forecasts of sustained residential construction at relatively high levels. Adverse weather conditions appeared to have retarded home building activity in a number of areas in recent weeks, but several members commented that underlying trends in housing demand were favorable and that residential construction had remained relatively strong in several parts of the country.

The outlook for fiscal policy was uncertain, especially with regard to whether longer-term spending and taxation measures would be enacted to implement the goal of a balanced federal budget. For the year immediately ahead, however, the members continued to anticipate considerable restraint in federal spending, partly as a byproduct of the current budget debate between the Congress and the Administration. With regard to the external sector of the economy, prospects for economic growth in major trading partners–led by developments in Europe–appeared to have weakened, and the recent appreciation of the dollar in the foreign exchange markets also might tend to damp net exports. Consequently, several members saw downside risks in the foreign trade sector over the year ahead.

Article Tags: Economic Growth, Federal Spending

71 thoughts on “What is Influencing Economic Growth and Federal Spending?”

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