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The economy appears to have a split
personality. Depending upon one’s point of view the economy is either
performing like the good Dr. Jekyll or like the evil Mr. Hyde. There are
several reasons for this difference of opinions. First, the economic
data is presenting a mixed picture of what is transpiring in the economy.
For example employment numbers from the survey of employers suggest that job
growth has been very disappointing for the nation. This survey indicated
that payroll employment across the country expanded by only 32,000 jobs in
July. Further, the employment increases in May and June were revised
downward by 30,000 jobs. In sharp contrast the government’s survey of
households suggests that 800,000 jobs were created during the last two months.
Secondly, the industry that a person works in and their particular occupation
will have a huge influence on their perception of how the economy is
performing. For example, manufacturing dominated states have been
particularly hard hit with declining payrolls over the past four years.
Increases in productivity and international competition have placed downward
pressure on manufacturing payrolls and compensation. Further, while
income levels in blue collar occupations have tended to stagnate, professional
occupational income levels have been growing quite nicely over the past number
of years. There are of course other examples of how a person’s
assessment of the economy will be dependent upon one’s personal situation,
but time will not allow for further elaboration.
Let’s take a dispassionate look at a number
of the major macroeconomic variables and try to assess the condition of the
economy. Real GDP, which measures the output of final goods and services
produced in the nation adjusted for inflation, grew by a healthy 4.8 percent
when measured from second quarter 2003 to second quarter 2004. Moreover,
the annualized estimate for the April-June 2004 period was approximately 3
percent. The second quarter 2004 real GDP growth figure came in under
estimates; however, the rate of growth was still quite respectable and shows
that the economy is expanding. Meanwhile the latest estimates on
consumer spending suggest it is growing at a good clip. Consumption
expenditures by households accounts for two thirds of all economic activity.
However, it is also clear that personal income growth has not kept pace with
consumption. Income growth is crucial for the long-term support of
consumption growth. It goes without saying that income growth is closely
tied to expanding payrolls, and for a large segment of the nation this has
been a difficult proposition.
Another issue affecting the economy is
investment spending on factories, plant, equipment, and inventories. The
nation’s business sector appears to be increasing their investment in the
aforementioned categories. Investment spending rose by a robust nine
percent in the second quarter. Increases in business spending are
normally a precursor to an improved labor market. It should be noted
that the slowdown in the economy during the early part of the 2000s was
largely attributable to a sharp pull back in business investment spending;
thus, an improvement in business spending bodes well for the economy.
This development is especially important since the impacts of the federal tax
cuts and easy monetary policy on the part of the Federal Reserve have just
about worked their way through the economy. In other words the economic
stimulus from these policy actions have done about all they are going to do
for the economy. Moreover, given the huge federal deficits, it’s hard
to imagine that the federal government will be able to provide much more
stimulus to the economy. Further, with interest rates at near record
lows, and with inflation becoming a concern, it seems unlikely the Federal
Reserve will be forthcoming with any additional appreciable monetary stimulus.
In conclusion, the majority of macroeconomic
forecasts suggest the economy will continue to expand over the next six months
and labor markets will continue to slowly improve. However, there are a
number of supply side issues that need to be considered and could possibly
cause a revision in the forecasts. These issues include rising energy
and health care costs. The Federal Reserve recently acknowledged that
the aforementioned supply-side shocks have been a drag on economic
performance, and if they persist they can move the economy away from full
employment and price level stability. |
