Latest Economic Data -- Growth, But No Cigar April 30, 2004
Many economists expected the first quarter of 2004 to be a near-boom -- instead, it was just a pretty good quarter.
Graphics:
GDP Growth
Wages and Salaries (adjusted for CPI Inflation)
Unemployment Claims
"Core" CPI Inflation
The U.S. economy has underperformed expectations since late 2002. After defying the conventional wisdom and rebounding smartly after September 11, the economy has been stuck in neutral. We've had moderate GDP growth, but consistently poor jobs figures, in spite of ultra-low interest rates and the largest fiscal stimulus since World War II.
Even a burst of growth in the 3rd quarter of 2003 -- which was associated with short-term tax cuts and the (seemingly) successful conclusion of the invasion of Iraq -- hasn't yet sparked a boom-like surge in wages or job growth. Employment finally started growing in the first quarter, but the labor market has a lot of lost ground to make up.
On Thursday, the Commerce Department reported the GDP growth in the first quarter was 4.2 percent, about the same rate as in the 4th quarter of 2003 (see Figure 1 below).
Normally, that would be considered quite strong, but with the huge amount of economic stimulus in the pipeline, economists were a little disappointed.
On Friday, the new monthly figures on personal income showed that wages and salaries are up by less than 2 percent over last year, once inflation is taken into account.
Again, this is a big improvement over the negative 1 percent growth of inflation-adjusted wages and salaries in the 2001-2003 period. But it is 3 percentage points short of the 5 percent real wage growth achieved during the boom years of 1998-2000 (see Figure 2 below).
Likewise, weekly initial unemployment claims announced on Thursday were 347,000 (the 4-week moving average). That's about halfway down from the 2001-2003 level of 400,000 a week, which corresponded with no growth in jobs, to the 300,000 level associated historically with robust job growth (see Figure 3 below).
Over the next year, economists have three big concerns about the economy:
1. Will job growth accelerate to 1990s levels and sustain a robust recovery?
2. Will inflation return, driving interest rates up from their historic lows?
3. Will the federal deficit cause economic instability in the U.S. as foreign investors allocate their funds elsewhere?
For consumers, the main questions are: Will higher interest rates drive down housing prices and drive up mortgage costs? Will jobs be plentiful enough that raises start to materialize? Will the government get its fiscal act together, or are big new tax increases inevitable, either in the next 5 years or after the baby boom generation starts to retire?
Those are all hard questions, and right now Washington doesn't have many answers.
Investors will be watching the inflation numbers very carefully over the next several months (see Figure 4 below).
So far, Wall Street hasn't panicked over the early signs of higher inflation and interest rates. That makes sense, because it was only a year or two ago that economists were more worried about deflation -- a persistent decline in prices that is generally associated with prolonged recession.
However, if inflation fears resurface and interest rates rise rapidly this summer, that could put a damper on consumer purchases of cars and homes, which have been a key force in the improving, but no-cigar economic recovery.
Figure 1.
Figure 2.
Figure 3.
Figure 4.
Links:
Centrists.Org No Inflation Problem Yet
04.14.2004 || So far this year, the Consumer Price Index (CPI) is up by 5 percent. Inflation worries are suddenly fashionable, but the latest data are really not that bad.
Centrists.Org Where the Jobs Aren't -- New BLS Data Confirm Gloomy Jobs Picture in 2003
04.07.2004 || New county-by-county figures from the Bureau of Labor Statistics (BLS) show trends in employment and wages between September 2002 and September 2003.
Centrists.Org The March 2004 Jobs Report -- A Big Improvement
preliminary 04.02.2004 || The number of jobs grew by 308,000 in March, and the average job growth for the first three months of 2004 is now 170,000.
