[Congressional Record Volume 141, Number 72 (Wednesday, May 3, 1995)]
[Extensions of Remarks]
[Pages E934-E935]
From the Congressional Record Online through the Government Publishing Office [www.gpo.gov]


                            ECONOMIC OUTLOOK

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                          HON. LEE H. HAMILTON

                               of indiana

                    in the house of representatives

                         Wednesday, May 3, 1995
  Mr. HAMILTON. Mr. Speaker, I would like to insert my Washington 
Report for Wednesday, April 26, 1995 into the Congressional Record.
                      The Outlook for the Economy

       With all the attention given to the Contract With America 
     in the first 100 days, it is also important to focus on an 
     issue of much importance for many Hoosiers--the state of the 
     economy and what can be done to strengthen the outlook.
       1994 was a year of solid economic growth, strong job 
     creation, and low inflation, a very unusual combination for 
     the postwar period. The Midwest, including Indiana, did even 
     better. Most everyone would be pleased if we could just 
     freeze the 1994 numbers. But analysts warn that the rise in 
     interest rates during the past year is slowing important 
     sectors of the economy--particularly housing and autos--and 
     that the rest of the economy may also shift into lower gear 
     this year and next.
       Performance Of The Economy. Economic Growth The economy's 
     total output of goods and services grew 4.1% last year. This 
     was the strongest growth in seven years and well above 
     average for the postwar period. Much of the growth was fueled 
     by a boom in business investment in new equipment. Housing 
     starts hit their highest level since 1988, output of motor 
     vehicles rose to the highest level in more than a decade, and 
     industrial production rose 5.4% over 1993, the strongest gain 
     in ten years.
       Jobs. The economy created 3.5 million jobs in 1994, the 
     strongest job growth in ten 
     [[Page E935]] years. More than nine out of every ten new jobs 
     were in the private sector, a sign of the revitalized 
     economy. Of major importance, particularly for the Midwest, 
     was the strong rebound in manufacturing jobs after the heavy 
     losses between 1989 and 1993.
       Unemployment. The strong job growth last year put many 
     unemployed people back to work. The unemployment rate fell 
     from 6.7% at the start of the year to 5.4% at the end of the 
     year, which is where it currently stands. There are now 1.5 
     million fewer unemployed workers than there were at the start 
     of 1994.
       Inflation. At the same time, inflation remained firmly 
     under control. During 1994, consumer prices rose only 2.7%, 
     the fourth year in a row of low inflation.
       Productivity. Productivity, a key to non-inflationary 
     growth, showed solid gains in 1994, for the second year in a 
     row.
       The Indiana Economy. For years, the Midwest lagged behind 
     the rest of the American economy. We suffered more during 
     recessions and took longer to catch up during recoveries. But 
     that has now changed. The Midwest has outperformed the 
     national economy in recent years, and especially last year. 
     We had stronger job growth and lower unemployment--in fact, 
     the unemployment rate in Indiana averaged about a point less 
     than the national rate. Midwest growth was led by our strong 
     manufacturing sector, which benefited from a big rise last 
     year in business investment and consumer spending, as well as 
     an increase in exports.
       The Economic Outlook. Early last year, the Federal Reserve 
     (Fed) began to tighten monetary policy, to keep the economy 
     from overheating and causing higher inflation. Between 
     February 1994 and February 1995, the Fed increased interest 
     rates seven times, for a total rise of three percentage 
     points. As a result, several key indicators suggest that the 
     economy is slowing. Housing starts have fallen for three 
     straight months and automobile sales are down from last 
     year's peak. Industrial production has also fallen recently, 
     and a big increase in unwanted inventories early this year 
     might force manufacturers to cut production even more.
       Most forecasters expect the economy to keep growing this 
     year and next, although at a slower pace than last year. Job 
     opportunities should also keep growing. But a few economists 
     warn that the Fed may have tightened too much and put the 
     economy into the danger zone of a new recession. In the past, 
     whenever the Fed raised interest rates by three percentage 
     points in a year a recession followed.
       Economic Policy. What can be done to keep the economy 
     growing and jobs increasing?
       Deficit reduction. In 1993, Congress made major progress in 
     bringing down the federal deficit. The improvement helped 
     reduce long-term interest rates and stimulated the strong 
     economic growth of 1994. Although the Fed reversed the 
     progress on interest rates last year, Congress should 
     continue to consolidate the gains on the deficit. The tax 
     reduction package recently passed by the House, providing 
     most of the benefits to upper-income taxpayers, was a big 
     step backward for deficit reduction. It will make it 
     extremely difficult to bring the budget into balance. I am 
     also concerned that the new Congress may try to rush things 
     by indiscriminately cutting programs that benefit the economy 
     along with those that don't. Trying to do too much too soon 
     may end in a deadlock that impairs further progress on the 
     deficit. But a measured and reasoned approach to further 
     deficit reduction would certainly be in the nation's long-
     term economic interest.
       Interest rates. It generally takes from six to eighteen 
     months for an increase in interest rates to have its full 
     impact on the economy. With most of last year's rate rise 
     coming since August, it will still be some months before we 
     can evaluate the full economic effect. Since there are 
     already signs of a slowdown, the Fed should clearly wait for 
     better information on the economy before making any further 
     rate increases. If the economic indicators show signs of 
     deterioration in the next few months, I hope the Fed will 
     actually consider reducing interest rates. With inflation 
     already under control, a recession would impose hardship on 
     millions of Americans with no benefit to the economy.
       Conclusion. The 1990s expansion is now almost four years 
     old and we have had some of the best economic numbers in a 
     generation. The performance of the U.S. economy in 1994 was, 
     in a word, outstanding. However, the question today is not 
     whether the economy is slowing, but how much it is slowing 
     and whether the Fed can achieve a ``soft landing'', trimming 
     growth from over 4% to around 2.5%.
       The economic statistics are important, but the real test of 
     economic performance for me is whether it improves the income 
     of working families, makes them feel more secure, and puts 
     them on the path to prosperity. On those measures, the 
     economic outlook must remain a top priority.
     

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