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For Immediate Release
Office of the Press Secretary
July 27, 2007
Press Briefing on the Economy by Senior Administration Officials
Dwight D. Eisenhower Executive Office Building
Chairman of the Council of Economic Advisors Ed Lazear
Secretary of Commerce Carlos Gutierrez
Secretary of Treasury Hank Paulson
Director of the Office of Management and Budget Rob Portman
10:28 A.M. EDT
CHAIRMAN LAZEAR: Well, thanks for being here. I'm going to lead off. I'm Ed Lazear, Chairman of the Council of Economic Advisers. Carlos Gutierrez, Secretary of Commerce; Hank Paulson, Secretary of Treasury; Rob Portman, Director of Office of Management and Budget are next to me. I will lead, just talk for about two or three minutes. If you have any questions, please ask me right then, because then I will be leaving, and then my colleagues are going to take over from there.
Let me just start by saying that we believe that the economy is back on track. The 3.4 percent GDP growth that we saw during the second quarter is an encouraging sign. I would say it can be summarized as follows: We got one point for consumption, we got one point from non-residential construction and equipment and software, we got a point from exports, a point from government spending, and we lost a half a point on housing. So a very balanced picture this time. And I would say that that, to me, is probably the most important story that we see in this number. Not only is the number a good, strong number, suggesting that the economy is healthy, but it also tells us that we have a somewhat different pattern than the one that we had in the past.
If we look back over the past few quarters, the economy has been driven primarily by consumption. That's not necessarily a bad thing, but when we recognize that our saving rate is negative right now, that's probably not a good long-term pattern. And we need to get back to a situation where we're consuming at levels that are more consistent with kind of a long-run trend.
The negative aspect of that, of course, is that when consumption declines, we take a hit in that quarter in terms of GDP growth and job growth. That did not happen, and the reason it did not happen is because we've had strong growth everywhere else. So even though consumption growth was not as strong as it had been, we had a balanced picture elsewhere. That, to my mind, creates a very robust economy and a very good picture as we move forward.
We see that in a variety of other measures, as well. Employment is still very strong. Every week, when we look at the initial claims for unemployment, that's consistent with a strong and growing labor market; 4.5 percent unemployment, 40 out of 50 states right now have unemployment rates that are below the average for the '80s and '90s. So we are looking at a very strong and healthy labor market. Wages continue to grow -- real wages continue to grow.
And finally I would say that the fact that profits are high and earnings are high is also encouraging, because it means that this is not in any way something that we have to fear as being indicative of false expectations. The economy is based on real fundamentals, and it does seem to suggest that as we move forward, we have a healthy picture.
So I'll just stop there, and again, if you have one or two questions, give them to me now, and then I'm going to turn it over to my colleagues.
Q How would you respond to the contention that a weak dollar is a sign of a weak economy?
CHAIRMAN LAZEAR: That's one that I'll turn over to Hank. Why don't you hold off on the --
SECRETARY PAULSON: All the tough questions he's going to --
CHAIRMAN LAZEAR: Yes, all questions on -- usually I have to say I can't answer it. This time I can say Hank is here, and he will answer it for you. If there are no questions, I'll just --
SECRETARY GUTIERREZ: I've got a few sides that I'll show you on GDP growth, and really breaking it down to the components of what contributed to growth and what detracted from growth. Something the President said this morning, when he talked about this quarter's GDP, which I think comes across loud and clear as you see the economy, and maybe over a longer period of time, is that this is a very resilient economy; it's a very diversified economy; it's a very flexible economy; and in spite of the fact that it's the largest economy in the world, because of our free enterprise system it has a way of naturally self-correcting, and it shows a tremendous amount of flexibility.
We've seen that, and that's the way we've been able to get through situations like 9/11, a stock market crash, a recession, corporate scandals, Katrina, you name it -- this economy has been able to withstand it, and has been able to adjust.
The other thing that I want to point out, that you'll notice in the second quarter numbers, which for us is a very important number, is the fact that net exports are a positive contributor to GDP growth, which means that the increase -- the absolute change of exports is greater than the absolute change of imports. And that's something that we have not had for a long time. And we know that we've had to get economies around the world growing faster to be able to export more. The fact that we have more free trade agreements, and they're now rolling up and we see more and more companies exporting, and just the fact that we are the largest exporter in the world, but we're growing our exports at a very fast pace, and I think that says a lot about our economy, our businesses, our system. And that's a very important contributor to this quarter's growth.
Compared the first quarter of 2007, you could see the impact from, on one hand, housing -- we had a change in inventories, and we are also -- we had a negative impact from that exports. This quarter the only thing that actually dragged down the growth of GDP was residential housing. Everything else contributed, including a very important contribution from that exports.
And then, just looking over a longer period of time, the point of flexibility and resiliency, and the fact that we are a diversified economy -- you can see that over time. In 2002, for example, government spending and consumer spending grew enough for offset, a very significant negative contribution from business investment, as well as net exports. So we were able to offset those two factors with consumer spending and government spending.
If you look at 2005, what you see is very strong business investment and consumer spending offsetting the decline in housing. And we've seen that just about every quarter, the ability of this economy to continue to grow because it is so diverse and because it is so strong.
Let me show you one more chart -- talked about exports, the fact that in spite of our size we are becoming a major, major exporter. Look at those first three years, real exports actually declined by almost 4 percent per annum. After 2003, you see a growth. These are real growth numbers, 8.3 percent on average. So we're exporting more, economies around the world are growing faster so they're able to buy more of our goods, and a very important factor here is the President's policy on free trade -- opening up markets, focused on exports, helping exporters access markets. That's all paying off.
I'll stop there and I'll turn it over to Secretary Paulson.
SECRETARY PAULSON: Okay. Carlos, let me say I, too, see a healthy U.S. economy, strong labor markets, great growth outside of the U.S. I've been looking at the global economy for a long time and I can't think of any time in my business career where I've seen such a strong global economy. And as Carlos said, we're really benefitting from that in terms of exports.
That's why it is so important to get our trade agreements with Peru, with Colombia, Panama, Korea done; why it's important to keep working -- and I know how hard Sue Schwab is working to get something done on Doha, and how much the President cares about that.
You know, we talk a lot about trade. We don't talk as much about being open for investment. And on May 10th, the President put out a statement on the open economy, open for trade and investment. Yesterday he signed the CFIUS bill. I just want to emphasize how important it is to us, to our country, direct foreign investment. This is key. We have 5 million jobs in this country that are directly related to investment. We've got another 5 million that are indirectly related to that.
It's also keeping markets open outside of the U.S. for investment -- very, very important. When a global company that's headquartered in the U.S. makes an investment outside of our country, that outgoing investment also is very beneficial to our country, because what the analysis shows is that those global companies that make investments outside of the U.S. are creating export platforms, and they make a disproportionate contribution to our economic growth through exports, and that if they're not making those investments, some other country is making those investments. And growth outside of the U.S. leads to more growth in the U.S. And again, that's something that we think is going to be -- has been important for a long time, and we can't forget it.
Now, the last thing I would say about the economy is
-- and I've received a fair amount of questions about volatility, market moves, those kinds of things, and I always start with looking at the underlying economic strength in the global economy and a very, very healthy U.S. economy. And when we have benign markets, strong markets, economic growth for a period of time, there can be a tendency to have excesses, to get a bit lax. Borrowers need to be disciplined; lenders need to be disciplined.
And what we've seen with this recent adjustment has been -- and it's been a repricing of risk, a reassessment of risk, and as we look at some of the signs of excesses, there have been excesses, LBL loans, that have been done without the traditional covenants. We've seen some of those same excesses when it's come to sub-prime lending and so on. But again, that's a wake-up call, and there's an adjustment and a repricing of risk.
On that, why don't I go to Rob.
DIRECTOR PORTMAN: Thanks, Hank. And Eddie, Carlos and Hanks have done a good job talking about the economy and the importance of some of the variables that you saw on the chart earlier, including, as Hank just did very well, I thought, the both in-bound and export side of our economy, which is critically important. As the global economy is increasingly integrated, we need to engage, and we are, and we're succeeding in the sense that our economy is stronger, jobs are improving, wages are up. So we have a lot of good news to report today.
This strong, resilient, diversified economy that was talked about earlier has also resulted in increased revenues to the federal treasury. And if you look at what's happened, really over the last three years we have a record level of revenue -- 37 percent increase in revenue since 2004. That has resulted in, along with some better restraint on the spending side, a decline in budget deficit.
This chart over here shows as a percent of the GDP, our debts are going down. It's also going down in nominal terms, meaning that for the past three years the deficit has actually gone down over $200 billion. Our projections that this year the deficit will go down at least $43 billion. We are now at about 1.5 percent of GDP -- our economy in terms of our deficit -- which is, as you can see by this chart, is far below the average of the last 40 years of 2.4 percent.
We continue to make progress on deficit reduction so long as two things happen: One, we keep restraint on the spending side; and second, we be sure that while our expenses are being restrained, our revenues continue to grow. And that's why these numbers today are encouraging, and why it's so important that as we look ahead we are going to be promoting and ensuring that the tax relief stays in place, that we not have tax increases, which would jeopardize this economic growth; therefore, revenues; therefore, the good progress we've made on the budget deficit.
Second, we need to be sure that our expenses, again, stay restrained. And what the President has offered this year in his budget resolution is an increase in the spending, almost 7 percent -- 6.9 percent. Congress has indicated that's not enough, we need to spend more than -- almost triple our inflation. And what the President has said is, no, there's a top line here and there is a number beyond which he cannot go. And that's the reason for the red line or the top line veto threat on some of these spending bills that are working their way through Congress now.
So this is important news today because it shows that a continuing strong economy is good for American workers; 4.5 percent unemployment, over 8.3 million new jobs in the last three years. It's also important for revenues, keeping the budget deficit going down. We need to be able to look forward and see how we can continue that, and that is keeping the tax relief in place, not jeopardizing this growth; and then on the expense side, being sure that our government spending continues to be restrained and we continue to prioritize our spending.
You will see this week and next week in the House and in the Senate continued debate on this. The President will continue to hold firm to the veto threat on individual appropriations bills that exceed the top line. He will also continue to talk about the importance, as Secretary Paulson does continually, of the mandatory or entitlement spending. And this relates to the S-CHIP debate that is currently being debated in the halls of Congress, that we want to be sure that while we're restraining the day-to-day and annually-appropriated spending, we also don't allow the entitlement spending to continue to grow at unsustainable levels.
So good news today and further evidence that a pro-growth economic policy works, and we need to be sure we continue it.
SECRETARY PAULSON: Rob, you said one thing that I wanted to build on, which is -- you had mentioned taxes. It's very important that Congress move to fix the AMT. They've done it every year for the last six years. This is the longest we've gone, and we need to fix that situation so there are not 21 million Americans paying an alternative minimum tax. That would surprise people. That's an unintended tax. And so that's something that needs to be patched or fixed.
Okay, let's have your questions.
Q As you know, this is the first estimate for GDP, and for the last three years and for the first quarter of this year all of them were revised downward. How worried are you that this is an artificially high first estimate?
SECRETARY GUTIERREZ: Let me just say, because those numbers come out of Census and are revised by BEA. We do a revision once every three years, and we also have three revisions to every quarterly number. It happened to be that these revisions were downward, but I think if you look at the shape of the growth, it doesn't change the story; it doesn't dramatically, or it doesn't really materially change the shape of our growth or the story of our growth. As time goes on, we get more reliable information. And that's just one of the realities of trying to add up a very complex set of data.
Q That was sort of the premise of my question, which is -- updated twice, but in the past it seemed to have been a quite optimistic at the front end, and then down. And I wondered how worried you are, looking forward.
SECRETARY GUTIERREZ: You're talking about projections?
Q Projections for the second estimate of the Q2, right.
SECRETARY GUTIERREZ: Well, we'll have to wait and see. But we're not expecting something that would change the fundamental story of the quarter. You may have -- we may have revisions up, we may have revisions down, as we've had them in the past, but I'm not concerned that it would be a different picture.
Q Secretary Paulson, can I start -- I think Secretary Gutierrez pointed out that there was only a single drag in the report, which was the housing. But consumer spending did weaken quite dramatically from the prior quarter. How concerned are you about the American consumer?
SECRETARY PAULSON: Let me step back and say, to build off what Carlos said about data -- I never place too much reliance on any month or any quarter. The key thing is the trend and the overall picture. And we have a very diverse, very flexible economy. And there are signs that business is increasing its investment, and again, very strong growth outside of the U.S. And in terms of the consumer spending number, it was lower this quarter, but again I think we need to look at it over a period of time here.
SECRETARY GUTIERREZ: Just to add to that, we've talked a lot about how our growth rate is reliant on consumer spending, and how it would be a good thing to diversify and have other sources of growth. The dilemma has always been, if consumer spending contributes a smaller portion of the growth, how do you offset the rest? The great thing about this quarter is that we saw it -- we saw it through net exports, we saw it through government spending. And I think it's a good reflection on the economy that we can take that kind of a breather and still grow at 3.4 percent.
DIRECTOR PORTMAN: Also, because Ed is not here, I will mention what he would mention, which is that it is good for the United States to have a higher savings rate. And what you see in these consumption numbers is slightly lower consumption projected for the second quarter, but will result in, therefore, somewhat higher savings, which deals with what Hank and Carlos have been talking about on the international side, as well, in terms of rebalancing our current account. So there are some positives in terms of -- from my perspective -- in terms of the improvement in terms of the U.S. savings rate that comes from that.
SECRETARY PAULSON: But again, we need to look at it over a period of time. You're going to get distortions and aberrations from one quarter to the next.
Q Thank you all for doing this. This is very interesting. Ambassador Portman, what's your sense of the outlook on the Hill for both the AMT fix and also some of the broader changes to the tax code that Secretary Paulson and your team have talked about?
DIRECTOR PORTMAN: I'd like Secretary Paulson to address that, as well. But let me just say, briefly, I totally agree with his comment earlier about the need to do the patch in the alternative minimum tax. As you recall, we offered a balanced budget where we did provide for a patch, which has about a $48 billion in our revenues in 2008, and yet we are able to show a balanced budget, the biggest impact for the 2007 patch being in the 2008 tax year. Congress did not choose to do that in their budget resolution, despite criticizing us for not fully covering all the AMT costs over time, and that concerned me at the time, and we commented on that.
Now, I agree with Secretary Paulson, we're beginning to get concerned that there be a plan in place to ensure taxpayers that there will, indeed, be a patch, as there has been in previous years. The patch that we included in our budget is the no net new filer patch, which is the most generous one that Congress has used in the past several years. And we believe that's the appropriate way to go.
So my concern is it hasn't been accomplished yet, also there doesn't seem to be a clear plan in place to accomplish that. We provide for it in our budget; Congress doesn't. We wish that they would move forward with that.
With regard to the prospects for it, I think they're generally good. I don't think that Congress at the end of the day is going to find it viable not to provide the patch, in the context of having trouble coming up with a broader reform. Second thing I'll say about reform -- and again I want Secretary Paulson to address this -- I am very encouraged by what Secretary Paulson is doing, in terms of looking at our corporate tax structure. This is an area ripe for reform, where, frankly, the code has not kept up with the realities of the rapidly-changing, integrated global economy we talked about earlier. The United States is falling behind, because our corporate tax rate is now relatively high, which Secretary Paulson can talk about with much more detail.
So there are lots of areas where reform is needed. One is certainly in terms of international competitiveness, and being sure that America continues to have a tax code that attracts new business investment.
SECRETARY PAULSON: Well, I don't have much to add to that. I had a conference yesterday, and what struck me was that when we brought in a wide range of experts, how clear everyone saw it that we had gone from having a corporate income tax that in the '70s wasn't competitive, to one that in the late '80s, with the '86 reform was relatively low, to now one which is relatively high. But the way in which we're thinking about this is in terms of competitiveness. And we're focused on it in terms of the benefits to the average worker, prosperity to Americans and jobs, higher wages, and what it takes to do that.
So for any given level of revenue, because any tax is a drag on the economy -- the reason you have a tax is we need taxes, we need revenue. So the question is, what's the best system to use to tax businesses so that we can be competitive?
And the world is changing, and it's changing all the time. And one of the real sources of growth for us right now for exports is Europe. The growth rate in Europe has doubled. And it's extraordinary to see what a number of these countries in Europe have done in terms of reducing their corporate income taxes, and what they're doing right now. Right now the Germans have another tax cut underway, through one house of the legislature; the French and the British are talking about it. So again, I think that's going to be something that's going to be very important that we all focus on.
Q Mr. Secretary, may I ask you, what does your intel, your conversations with the Hill, suggest to you about the appetite for such a reform?
SECRETARY PAULSON: Well, I think we need to do more work, there's no doubt about it. This is going to be something I'm going to have to work on very hard for the 18 months I'm here. And we're going to have to -- first of all, there's going to have to be greater understanding and recognition as to how the world has changed. There's going to have to be greater recognition that businesses are -- they come with different corporate structures, that's a legal structure, but the taxes are paid by people. And so we -- and then we're going to need to take a number of tangible steps. So what we're going to do is we're going to sort of reassess where we are, and you're going to see a number of actions and steps taken over the next 18 months on this.
Yes, in the back.
Q Secretary Paulson, are you worried that the reassessment of risk that you see might end up hurting the economy in the next couple months?
SECRETARY PAULSON: Again, step back, because that when there are big adjustments in markets based upon economic fundamentals, that's one thing; but when you have economic fundamentals that are strong, that's a better place to be.
Listen, I've been watching markets for a long time; it's my job to be vigilant, so I'm watching these markets carefully. There is -- there has been this adjustment, this reassessment of risk. I view it exactly as I said to you. There were excesses in the system. This is a wake-up call. We need to see more discipline in certain areas. And so -- but I take comfort from the underlying economic strength. There are a number of hung bridge loans in the high-yield market. Those aren't -- the underlying companies, the underlying economy hasn't changed. Those were loans that were put in place without traditional covenants. And again, lenders need to be very aware of the risk, borrowers need to be aware of risk, and I would submit that people are more aware of those risks and the need for discipline today than maybe they were a month or two ago.
So again, let's keep our eye on the very strong underlying economy, which puts us in a position of strength.
Q You're going to China tomorrow, I guess, and yesterday the Senate Finance Committee passed -- a bill on currency. I'm wondering if you think that that pressure will help you in your efforts to get the Chinese, or if it will hurt you.
SECRETARY PAULSON: Well, very clearly, we share the same motives with Congress. We would like to see the Chinese move and show more flexibility. I believe very, very strongly that the right way to deal with a sovereign nation is not through protectionist actions, but by making the case to them, very directly, as to why it's in their best interest. And it is in China's best interest and it's in our country's best interest that they proceed with their reforms.
This is a complex economy, it's a big economy, it's integrated into the global economy in terms of goods and services that -- we were talking about this earlier today, Carlos and I -- that this is -- the fact that they're growing so quickly is an opportunity which we want to capture. And those that are concerned about China I think are worried about the wrong things, because if China -- if their economy were to falter, if there would be some economic shocks, that wouldn't be good for China, that wouldn't be good for us. It's very important that they grow and grow stably, and to do so they need to continue to reform. And I believe the right approach is the approach we're pursuing, and it's not a legislative approach.
END 10:57 A.M. EDT