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The U.S. Department of Commerce
reported that real GDP expanded by 3.1 percent during the first three months
of 2005. The aforementioned figure is calculated on an annualized basis. When
real GDP is measured from first quarter 2004 to first quarter 2005, the rate
of change was a more impressive 3.6 percent. Even though Wall Street investors
were disappointed that the rate of growth came in under forecast, the
expansion of the national economy was very respectable.
Raw data generated by various
sources in the Federal Reserve System and the Wisconsin Department of Revenue
suggest that the national and state economies are on firm ground. However,
this is not to suggest that there aren't some aspects of the economy that
aren't troubling and warrant some concern. We will start with the reasons for
optimism about the economy and then turn to areas of concern.
Household spending, which
accounts for two thirds of all economic activity, will continue to expand at a
brisk pace. Moreover, it is forecasted that consumption will rise by about 3.5
percent in 2005. Another major component of the economy is business
investment. Firms have been adding significantly to the nation's capital
stock. Further, the additions to factory, plant, equipment, and inventories
should grow by about 7 percent this year. While not nearly as strong as last
year's 13 percent rate of change, the pace of activity is very respectable. In
addition, personal income is forecasted to grow in the 5 to 6 percent range
over the course of the year, and employment at a more modest 1.4 percent rate.
However there are areas of
concern. Inflation rose sharply in the first three months of this year. Many
analysts think that higher energy costs act as a drag on the economy. So far
the drag appears to have been minimal, but there remains a great deal of
concern about the energy situation. Forecasts from the Federal Reserve suggest
that oil prices will remain elevated through the remainder of this year and
into 2006. The good news is that even with higher oil prices, the economy will
have time to adjust and the overall price level will tend to become more
stable. In other words, the impact of higher energy prices will have already
been transmitted through the economy and would do little additional harm to
the price level of all other goods and services. Thus, economists are
suggesting that inflation will come in at about 2.5 percent for 2005, and
about 2.0 percent in 2006. However, it should be pointed out that forecasts
can be well off the mark when unforeseen events take place. In today's global
economy, unforeseen events have a greater potential to upset the best
forecasts. For example, how will the economies in China and India perform and
hence their demand for oil change? Or will political unrest in other parts of
the world cause disruptions in energy production?
Other issues that loom large in
the future that could potentially influence the national and state economies
are the growing trade deficit and federal budget deficit. Alan Greenspan, the
chairman of the Federal Reserve Board, in testimony before the U.S. Congress,
warned that the deficits pose a serious threat to the long-term economic
health of the economy. In other words, these deficits are not sustainable and
at some undetermined point in the future, economic forces will be set into
play that will bring the situation back into equilibrium. This could result in
a very painful period of adjustment for the country. It seems that a prudent
course of action would be to address these issues as quickly as possible in
order to mitigate the potential damaging effects of the adjustment process.
In sum, it appears that the
national economy will grow about 3.5 percent during 2005, and Wisconsin will
likewise experience respectable growth. Nonfarm payrolls for the state are
estimated by the Wisconsin Department of Revenue to grow by 1.8 percent.
However, inflation and the twin deficits continue to loom in the background
with the potential to harm the long-term prospects for the economy. |
