United States of America
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Country Report December 2002 United States of America United States of America at a glance: 2003-04 OVERVIEW The Republican president, George W Bush, will derive significant political benefit from his party's strong showing in the mid-term election on November 5th 2002, and this should boost his prospects for re-election in November 2004. As his party is now in control of both houses of Congress for the next two years, Mr Bush will be in a much stronger position to implement his domestic policy agenda. The showdown with Iraq will come to a head in the next few months. Despite a new UN resolution that lays down a strict timetable for Iraq to comply with commitments to disarm or face "serious consequences", the Economist Intelligence Unit continues to believe that the chances of this process delivering an acceptable outcome to Mr Bush are remote, and that a US-led military assault against Iraq is very likely in the first half of 2003. Fiscal policy will remain loose and interest rates will be held at or around their current low levels in 2003. GDP is forecast to grow by 2.3% in 2003 and 3.2% in 2004. Inflation will not pose a serious problem, but the current-account deficit will remain substantial. Key changes from last month Political outlook • Following the November 5th mid-term election, a lame-duck session of the outgoing Senate hammered out a deal to create the Department of Homeland Security. Although the new department will come into being in early 2003, it will take several years to stitch together its various components. Economic policy outlook • A continuing weak economy remains one of the biggest risks to Mr Bush over the next two years. Fiscal policy is ever more likely to focus on stimulating the economy than on eliminating, or even reducing, the budget deficit. Economic forecast • Economic performance continues to be mixed, and economic prospects for 2003-04 have not improved despite some positive data released in November. December 2002 The Economist Intelligence Unit 15 Regent St, London SW1Y 4LR United Kingdom The Economist Intelligence Unit The Economist Intelligence Unit is a specialist publisher serving companies establishing and managing operations across national borders. For over 50 years it has been a source of information on business developments, economic and political trends, government regulations and corporate practice worldwide. The Economist Intelligence Unit delivers its information in four ways: through its digital portfolio, where the latest analysis is updated daily; through printed subscription products ranging from newsletters to annual reference works; through research reports; and by organising seminars and presentations. The firm is a member of The Economist Group. 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United States of America 1 Contents 3 Summary 4 Political structure 5 Economic structure 5 Annual indicators 6 Quarterly indicators 7 Outlook for 2003-04 7 Political outlook 10 Economic policy outlook 12 Economic forecast 17 The political scene 21 Economic policy 24 The domestic economy 24 Output and demand 26 Employment, wages and prices 28 Financial indicators 30 Sectoral trends 33 Foreign trade and payments List of tables 12 International assumptions summary 13 Gross domestic product by expenditure 16 Forecast summary 24 Gross domestic product 27 Non-agricultural employment 28 Price inflation 29 Financial markets 34 Balance of payments 35 International trade in goods and services List of figures 17 Gross domestic product 17 Dollar real exchange rates 25 US GDP and its components 27 Wages and prices 29 US equity prices Country Report December 2002 www.eiu.com © The Economist Intelligence Unit Limited 2002 . United States of America 3 Summary December 2002 Outlook for 2003-04 As the Republicans are now in control of both the executive and legislative branches of government for the next two years, the president, George W Bush, will pursue an aggressive legislative agenda that may include new tax cuts, more business-friendly laws and greater attention to defence and homeland security. Barring some cataclysmic event, such as a badly planned or executed war in Iraq or a prolonged slump in the stockmarket causing another recession, the chances of the Republicans choosing anyone else as their presidential candidate in 2004 are remote. The federal budget is expected to remain in deficit in fiscal years 2003 (October 2002-September 2003) and 2004. Interest rates will start to rise in 2004 once economic growth is more firmly established. GDP growth is forecast to average 2.3% in 2003 and 3.2% in 2004. Inflationary pressures will remain under control, but the current-account deficit will continue to be worryingly large. The political scene Republican gains in the mid-term election on November 5th have been attributed largely to Mr Bush. His focus on security issues resonated with ordinary Americans, and homeland security and the war on terrorism will remain near the top of the political agenda for the next two years. There is a widespread perception that the Democrats have lost their sense of direction. The gubernatorial elections produced some positive results for both parties. Economic policy The reappearance of budget deficits suggests that fiscal policy will be a divisive issue for the new Congress. Mr Bush wants to make permanent the US$1.35trn ten-year tax cut passed in 2001, and other more immediate tax cuts are also in the offing. Concern about slackening economic growth prompted the US Federal Reserve (the central bank) to cut the federal funds rate by 50 basis points to 1.25% on November 6th. The drive to improve corporate governance has been thrown into disarray by a number of high-profile resignations. The domestic economy Despite GDP growth at an annualised rate of 4% in the third quarter of 2002, overall economic performance is decidedly mixed. Employment fell in both September and October. The Dow Jones stockmarket index is heading for its third consecutive annual decline in 2002. The airline industry is in serious trouble. The antitrust case against the computer software giant, Microsoft, has been settled finally. There has been a sharp deterioration in the financial health of corporate pension funds. The dockworkers’ dispute has been resolved. Foreign trade and payments Bilateral trade agreements are becoming the cornerstone of the Bush admini- stration’s trade strategy on the grounds that they encourage “competitive liberalisation”. Major doubts remain about the feasibility of the timetable for a Free Trade Area of the Americas. The current-account deficit remains at record levels. Editors: Gerard Walsh (editor); Edith Hodgkinson (consulting editor) Editorial closing date: November 29th 2002 All queries: Tel: (44.20) 7830 1007 E-mail: [email protected] Next report: Full schedule on www.eiu.com/schedule Country Report December 2002 www.eiu.com © The Economist Intelligence Unit Limited 2002 4 United States of America Political structure Official name United States of America Form of state Federal republic Legal system Based on the constitution of 1787 Federal legislature Bicameral: Senate of 100 members directly elected on a plurality (first-past-the-post) system for a six-year term, with one-third of its members retiring every two years; House of Representatives of 435 members directly elected on a plurality basis for a two-year term. The Senate has the power to confirm or reject presidential appointments, including the cabinet, and to ratify treaties; the House of Representatives has the sole right to initiate revenue bills, although they may be amended or rejected by the Senate Electoral system Universal direct suffrage from the age of 18 National elections November 5th 2002 (House of Representatives and one-third of the Senate); next elections due on November 2nd 2004 (presidential, House of Representatives and one-third of the Senate) Head of state Executive president elected by popular vote via an electoral college of 538 members