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The biggest economic story of the third quarter was the 7.2 percent annualized
growth rate in gross domestic product. Though
the vast majority of forecasting organizations indicated there would be an
improvement, the rate of growth was supposed to be in the 4 to 6 percent
range, depending on the forecast.
What
factors account for the unusually robust increase in the dollar value of final
goods and services produced in the economy?
Household consumption, business investment, residential construction,
and export activity dramatically expanded to give the U.S. economy its highest
rate of quarterly growth rate since early 1984.
As mentioned in previous CWERB reports, there has been a great deal of
stimulus applied to economy, suggesting it was only a matter of time until the
stimulus would ignite economic activity.
The
Federal Reserve has been pumping in tremendous amounts of liquidity into the
economy. This accommodative monetary policy has helped to keep
borrowing rates at historic lows. In
addition, fiscal policy on the part of the federal government has also been
expansive in nature. Increases in
government spending and the biggest tax cuts in history added to the stimulus
being applied to the economy. However,
it is very unlikely that the economy will continue to expand at this pace.
Most forecasters are indicating that, with this much momentum, a 4
percent growth rate for gross domestic product is quite likely in 2004.
It
must be noted that the economy continued to shed jobs in third quarter.
By some accounts, the economy lost another 41,000 jobs during the
July-August time frame, and the unemployment rate hovers around 6 percent.
Thus, the improvement in gross domestic product comes mainly from gains
in worker productivity. Until
such time that there is an improvement in national employment numbers and the
unemployment rate, many people will not believe that the economy is really
improving.
A
hopeful sign that matters will improve on the job front is that business
investment in factories, plant, and equipment rose by about 11 percent on an
annualized basis during the third quarter.
This is the highest growth rate for business investment in about three
years. Business firms typically
will only expand their operations when they feel comfortable about the
potential profitability of an investment.
Historically speaking, increases in business investment have been a
precursor for expanding payrolls. Job
growth has always been considered a lagging indicator of the economy.
Usually businesses will squeeze as much productivity as possible out of
their existing workforce before making the expensive decision to hire more
workers. A caveat to this is that
over capacity in many industries remains a significant problem.
However, prolonged and significant increases in demand and the eventual
obsolescence of facilities over time will reduce the overcapacity issue for
many industries.
However,
as I have indicated in other reports the problems in manufacturing may be more
persistent than initially estimated. Comments
about a jobless recovery ignore the job growth that has taken place in a
number of sectors when measured from 4th Quarter 2001.
For example, financial activities, education and health services,
leisure and hospitality, and government have all experienced job growth at the
national level. Lagging sectors,
including manufacturing, retail, and transportation and warehousing, have
experienced a continued decline in payroll numbers.
However, a closer examination of the figures shows that the decline in
manufacturing payrolls accounts for about 80 percent of the contraction.
In
other words, the manufacturing sector has been and continues to be the sector
hardest hit by the prevailing economic conditions.
Manufacturing payrolls were declining even before the recession began.
Over 17.1 million people were employed in manufacturing at the start of
2001; by mid 2003, the number had collapsed to 14.8 million.
This situation, along with a sharp increase in the percent of
individuals unemployed for more than 27 weeks, suggests that we are
experiencing a structural rather than cyclical change in our economy.
Nearly 22 percent of the people unemployed have been out of work for
more than six months.
A
fundamental shift away from manufacturing employment-based jobs has strong
implications for manufacturing-dependent on states like Wisconsin.
While it is true that macroeconomic policies that lower interest rates,
ease monetary conditions, increase defense expenditures, and cut taxes may
stimulate aggregate demand, but they may do little for the domestic
manufacturing sector if the demand for manufactured products can be easily
satisfied from worldwide sources, or from increases in domestic productivity. These circumstances seem to suggest that the domestic
manufacturing sector will continue to lag behind the rest of the economy.
Manufacturing
jobs often pay relatively high wages and provide a good living for
blue-collar, semi-skilled workers. If
this type of employment becomes increasingly difficult to come by, how will
this segment of our workforce be able to compete in a knowledge intensive
global economy? This is a very
serious problem and will affect the entire nation.
Consider that in 1990 only about 14% of our economy was involved with
exporting or importing. By the year 2000, exporting plus importing activity accounted
for approximately 29 percent of GDP. There
is little doubt that the U.S. economy has become much more integrated with the
world economy. The layoffs
planned by the paper company Stora Enso North America illustrate this point.
Stora Enso, is one of the largest employers in central Wisconsin and is
headquartered in Finland. Approximately 2,650 people in Central Wisconsin are employed
by this company. Due to global
overcapacity in the paper products industry the company recently announced
that it would eliminate about 500 local jobs by mid 2005, reducing their
employment to about 2,150 workers in the Wisconsin River valley area.
In addition, a recent study from UW-Madison reports that Wisconsin has
lost more than 50,000 manufacturing jobs over the past two years.
In
sum our nation is going to have to develop a strategy to respond to the
challenges posed by a global economy. Traditional
macroeconomic solutions will not raise all boats in a post NAFTA and WTO era.
Serious consideration will need to be given to the training and
education of our workforce. This
of course comes at a time when the nation and states are incurring massive
budget deficits and the outlook for education and training programs are bleak.
However, if this situation is not addressed this country will become
increasingly divided from an economic and political standpoint.
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