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The Federal
Reserve Board has a new chairman in the person of Ben Bernanke. More than any
other individual the Fed chairman has a tremendous amount of influence in
shaping money and credit policy in the
United
States. As the new head of the nation’s central bank, he takes over from the
near legendary Alan Greenspan who served as Federal Reserve chairman for
eighteen years. What are the main issues confronting the economy as Benanke
takes the helm?
The
nation’s GDP rose by only 1.1 percent in fourth quarter 2005. This represents
a significant slowdown from the nearly 3.7 percent pace during the first three
quarters of the year. The deceleration is generally attributed to the after
effect of the September hurricanes and a temporary fall off in military
procurements. These items are transitory in nature and should not be an issue
as we move forward in 2006.
The
unemployment rate at the national level continues to move lower. The
seasonally adjusted rate stood at 4.9 percent in December. To place this in
perspective, in late 2003, the rate was around 6.3 percent. Thus, much
progress has been made in this area over the last two and a half years.
Likewise, employment has expanded by almost 2.0 percent over the past twelve
months. The number of people employed has risen from 140.3 million to 142.9
million over this time frame.
With the
economy expanding there are growing concerns about building inflationary
pressure. From fourth quarter 2004 to fourth quarter 2005 the Consumer Price
Index rose by 3.4 percent. More recently the rate of change appears to be
accelerating. Energy and food price increases are the main items driving
these figures. Given the uncertainty surrounding the Middle Eastern situation
there is additional cause for concern. No one at this juncture knows how the
Iranian nuclear problem will unfold. The implication for energy prices may be
dire and have a large impact on our economy.
Another
issue pertaining to inflationary pressure is the fourth quarter slowdown in
worker productivity. Higher levels of employment and rising wages coupled
with a decline in productivity translated into additional pressure on the
average price level for consumers. Hopefully the decline in productivity is a
transitory matter and simply reflects the higher cost of energy.
Housing
prices in the larger metropolitan areas appear to be overstated. A number of
studies suggest this is the case. Many pundits worry about the consequences
of a housing bubble and the impact on the economy if it burst. Consumer
spending to a large degree has been supported by the increase in housing
wealth. If Bernanke should feel the need to continue and accelerate the pace
of interest rate increases to combat inflationary pressures, this could pop
the “housing bubble” and of course have consequences for consumer spending.
With consumer spending accounting for two thirds of all spending in the
nation, it is clear that a significant downturn in household wealth would
impact the economy. Let’s hope that Bernanke is not put into a position where
he might have to choose between keeping inflation under control and throwing
the economy into a recession.
Another
issue confronting the country is the stagnation in median household income.
In 2003, real median household income stood at $44,482 while in 2004 it
slipped to $44,389. Moreover, the poverty rate climbed slightly from 12.5
percent in 2003 to 12.7 percent in 2004. As of the time of this report the
2005 figures were not available. Thus, even with an expanding economy the
gains in prosperity apparently have not reached middle income and lower income
households. This problem must be addressed by the nation or we will run the
risk of a further polarized society.
There are
of course many other issues facing the nation’s economy. Examples include the
record string of federal budget deficits, trade deficits, and our country’s
growing reliance of foreign capital. Thus, the Fed chairman and other policy
makers are going to have a very interesting time in the year ahead.
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