Gross Domestic Product and Industrial Production - After real GDP averaged 3.25 percent annual growth in the 1990s, the economy fell into recession in the second and third quarters of 2001. The events on September 11, 2001 exacerbated the downturn already in progress. Although GDP recovered in the first quarter of 2002, the economy has grown in fits and starts since then. The economy has remained afloat thanks to consumer spending and a strong housing market. But the economy soared during the third quarter, thanks in part to the tax cuts that gave consumers more money to spend. And there were signs that businesses are beginning to spend as well. Industrial production has diminished in proportion to the overall economy and in its effect on business cycles. Yet industrial production, which still accounts for roughly 15 percent of total U.S. production, can still drag growth down. Manufacturing continues to be a drag on the economy although it has been showing signs of life. Advance third quarter GDP surprised analysts when it jumped by an annualized 7.2 percent rate and by 3.3 percent when compared with the third quarter of 2002.

The United States continues to grow more rapidly than Europe. One reason is its flexibility - the ability to adjust to new conditions unlike Europe, which continues to be hampered by structural rigidities. The Federal Reserve is also more responsive to changes in the U.S. economy than either the ECB or Bank of Japan.

Inflation - Inflation continues to be well behaved, giving the Federal Reserve the freedom to decide policy on other factors that affect growth. The inflationary pressures that developed earlier in the year were the result of higher energy prices brought on by the unknowns of the Iraqi situation. Despite the falling value of the dollar, prices for imports remain low, helping to keep inflationary tendencies under control. Now there is concern that prices might fall too far and result in deflation. However, the probability of this occurring is minute.

Unemployment - The civilian unemployment rate bottomed at 3.9 percent in September 2000, a rate not seen since January 1970! But with the onset of recession, unemployment has since climbed especially in the manufacturing sector. Increases in unemployment, though, have been mitigated by the mild nature of the recession. Unemployment is typically a lagging indicator and generally increases even after a recovery is in place. Employers wait until demand picks up before hiring new workers. Even at relatively low levels, a rising jobless rate has a negative influence on consumer sentiment. Rising unemployment is usually associated with reduced earnings and reduced retail sales. Employment has continued to shrink, especially in manufacturing. But the unemployment rate has been rather stable as discouraged workers drop out of the labor force and are no longer counted. The unemployment rate inched down to 6 percent in October.

Merchandise trade - The United States reliance on foreign goods intensified in the 1990s, although export growth improved modestly during the period too. In good economic times, imports help alleviate demand pressures and therefore help curtail price inflation for goods and services. In downturns, a decline in demand for goods also leads to a drop in import demands so that foreign producers feel the effect of a U.S. downturn and the negative impact on domestic producers is mitigated to some extent. Investors overseas have mixed feelings about the U.S. trade deficit. On one hand it means that U.S. consumers continue to buy their exports, which in turn stimulates their domestic economies. However, others worry that the spiraling deficit could lead to a precipitous fall in the value of the dollar.