Summer Economic Update -- Moderate Growth and Slowly Improving Labor Markets
July 9, 2004

The lower-than-expected increase in June payrolls -- only 112,000 -- shouldn't be over-interpreted.  The pace of job growth will probably stabilize at about 200,000 a month this summer.  On the other hand, the sharp drop in unemployment claims reported yesterday is almost certainly a statistical aberration.  It does not necessarily imply that the unemployment rate will soon begin to fall.

After a temporary boom last summer caused by tax cuts and the apparent end of combat in Iraq, the economy has slowed to a more normal growth pace in 2004. 

Likewise, employment showed a temporary boom this March and April -- a lagged reaction to the sudden economic spurt last year (see Figure 1).

Figure 1.



With no new fiscal stimulus in the works, and with the Federal Reserve starting to raise interest rates to head off any inflationary threat, economic growth and job gains will probably be steady, but subdued for the remainder of 2004.  Continued violence in Iraq, high oil prices, and worries about terrorism will restrain the economic recovery.

The big political question is:  Will moderate economic growth and slowly improving labor markets in 2004 be sufficient to boost President Bush's re-election prospects?

The answer to that question will depend on whether Americans view the glass as half-full or half- empty. 

Job growth has averaged about 210,000 per month since January.  Assuming that pace continues, the economy will have added over 2 million jobs in 2004 by the time voters cast their ballots in November.

However, even that solid pace of job gains won't do much to reduce the unemployment rate, which is currently stuck at about five and one-half percent. 

Moreover, the number of jobs fell by 2.5 million between March 2001 and December 2003.  So even if the economy adds 2 million jobs in 2004 by election time, workers would still be facing a smaller job market than in the beginning of 2001.

Finally, the recent drop in unemployment claims seems to be a statistical blip caused by out-of-date seasonal factors (see Figure 2).

Figure 2.



The trend for unemployment claims remains about 340,000 per month, which corresponds to moderate growth in jobs and only the smallest downward nudges in the unemployment rate.

Meanwhile, the bond market doesn't know what to think.  Longer term interest rates started rising when the March jobs report showed the first big increase in years (see Figure 3 below).  Rates continued higher when inflation figures started to spike (reflecting the temporary economic surge), and when April's jobs report also came in strong.

However, since the beginning of May, the 10-year Treasury bond rate has stabilized or even drifted a little lower, despite that fact that the Federal Reserve is beginning to raise short term interest rates. 

The weaker jobs reports from May and June indicate that a full-out economic boom is not yet at hand, and that the economy is likely to continue its moderate-growth path, with an eventual return to lower inflation rates and a dissatisfying expansion of job opportunities.

The main wild card in the economic outlook is the federal deficit.  The deficit continues to worsen, in spite of the economic recovery. 

If investors and foreign central banks begin to doubt Americans' longer-term commitment to balanced budgets, they may be less apt to invest in U.S. securities.  They may start to fear the U.S. will inflate its way out of the debt obligations.  The unfortunate result could be a sudden devaluation of the dollar and a surge in U.S. interest rates.

Figure 3.



Links:
Centrists.Org More Good News on Jobs -- More Bad News on the Deficit (revised May 13, 2004)

Centrists.Org Latest Economic Data -- Growth, But No Cigar (April 30, 2004)

Centrists.Org No Inflation Problem Yet (April 14, 2004)