Economic growth has increased markedly since the spring, supported by highly stimulative fiscal and monetary policies. Consumption responded strongly to increases in disposable income induced by tax reductions, and business investment rebounded noticeably. Military expenditures are providing a further boost to demand. The recent rapid productivity growth bodes well for future investment and growth. Despite its strength, the current recovery is only beginning to generate employment gains and to support consumer confidence. With inflation slightly below desirable levels, monetary policy has remained supportive, but interest rates will need to be raised as the slack in product and labour markets dissipates. Government finances have deteriorated substantially as a result of tax cuts, additional military spending, and the widening output gap. The large deficits projected over the coming years underline the need to adjust current policies towards balancing the budget to cope with impending demographic pressures...