The Economic (tick...tick...) Boom
One of the most hyped movies of the year was The Day After Tomorrow, during which every major environmental calamity that could happen did. The movie did well enough, but was no major blockbuster.
But in the economic world, there just might be a major blockbuster coming, one of Titanic proportions.
Inflationary pressures have led some economists to worry about a possible nightmare scenario: The dollar weakens dramatically, which drives up import prices; as terrorists attack overseas oil production facilities, which drives up energy prices; and like that, America's productivity miracle, a main reason for moderate inflation in recent years, disappears.
Two on the aisle?
After years of relative calm on the inflation front, Americans are being battered by $2-a-gallon gasoline, rising food prices and higher medical bills. And there are fears that price pressures could worsen in 2005.
By contrast, the American economy is powering ahead. Industrial production rose in October to 5.2% above last year’s level. Housing starts in October were 6.4% above the previous month and 2.2% above the October 2003 figure. Retail spending was up sharply last month. Consumer confidence is up, partly as a result of the improving jobs market, and partly because the widely anticipated post-election delay in naming a winner just didn’t happen. Share prices are so buoyant that a New York Times headline reads “It feels like the 1990s” and one in The Wall Street Journal refers to the “current mood of euphoria”.
In China long lines formed at banks as depositors withdrew their dollar accounts and converted them to euros, yen or even China’s own currency.
The threat of higher inflation will come not only from China but other Asian countries. They fear a loss of export sales because of China's currency manipulation, so they have managed their currencies to keep them from rising against the dollar.
"Once the Chinese revalue, almost three-fourths of consumer goods imported into the United States will see price increases," said Mark Zandi, chief economist at Economy.com. He said a change in China's currency policies was likely next year and could raise U.S. inflation rates by at least one-half a percentage point.
So Europe will continue to be hit by a double whammy, the “brutal” effect on Europe’s already sclerotic economies that has so upset Jean-Claude Trichet, president of the European Central Bank. The euro is bearing almost the entire weight of the falling dollar, making euroland exports dearer in America. Meanwhile, the Chinese currency falls with the dollar, giving China’s exporters an even greater competitive edge in Europe's markets.
Analysts note the dollar already has fallen by about 26 percent since early 2002 against a market basket of major currencies while import prices have risen only slightly. Foreign producers, not wanting to lose U.S. market share, have been absorbing much of the difference from a falling dollar.
"Foreign producers want to keep a strong foothold in the United States," said Nariman Behravesh, chief economist at Global Insight in Lexington, Mass.
Indeed, we hear less talk that the Federal Reserve Board’s monetary policy authorities, having raised interest rates to 2%, might stop there. Not only is the economy doing well, but inflation picked up last month. Wholesale prices rose in October by 1.7%, the largest increase in 15 years. Energy prices led the way — no surprise there. But food prices (+1.6%), floor coverings (+0.8%), and construction machinery (+2.7%) also jumped.
Given the expectation that inflation will ease, analysts see no reason for the Federal Reserve to deviate from its plan to raise interest rates by steady increments of one-quarter of a percentage point through most of the central bank's meetings in 2005.
Of course, if inflation does start rising at a faster pace, the Fed undoubtedly will respond with bigger rate increases. "The Fed has to balance the risks between inflation and economic growth," Wyss said. "I think they are doing a good job, but one of the problems for the Fed is that you can never know the future."
At the consumer level, food, housing and clothes prices were up in the past three months at annual rates of 3.4%, 2.6% and 2.3%, and medical care prices rose even more, by 3.9%.
The problem came into sharp focus last week when the government reported that wholesale prices increased in October by the largest amount in more than 14 years, and prices at the retail level recorded the biggest gain since May.
At the same time, energy prices experienced another jump, climbing at an annual rate of 22.5 percent through October. This has contributed to inflation's rising at a 3.9 percent annual rate this year, compared with 1.9 percent in 2003.
It is not at all certain that this recent past is prologue. Industrial production may be up, but part of the increase “appears to reflect a partial bounceback from the restraining effects of the recent hurricanes,” says the Fed.
Another worry on the inflation front is whether the burst of productivity the country has enjoyed since the mid-1990s will continue.
The increase in the amount of output for each worker has meant higher corporate profits and raises for employees without making shoppers pay more for goods. Should productivity growth slow significantly, as some fear, companies might have to start raising prices.
Dead End for the Bush Economy
Sunday November21, 2004
The disappearing act of employment growth:
* Employment growth has declined for the past consecutive months.
* Employment gains in July were the lowest since December 2003.
The monthly percent changes in employment reached their highest point during this recovery in March 2004. Since then, employment growth has continuously slowed. Employment growth in July 2004 was the lowest in all of 2004.
* At this point, the economy still has 1.2 million fewer jobs than at the start of the recession in March 2001.
* If employment growth had kept pace with population growth in this recovery, there would have been 4.0 million more jobs in July.
* If employment growth had kept pace with population growth since the recession, there would have been 6.9 million more jobs in July.
Total payroll employment in July 2004 was still 1.2 million jobs less than at the beginning of the recovery. If job growth had kept pace with population growth since the start of the recovery in November 2001, there would have been four million more jobs, and if employment growth had kept pace with population growth since the start of the recession in 2001, there would have been 6.9 million more jobs in July 2001.
Source: Bureau of Labor Statistics, Payroll Employment, and author's calculations.
Wage growth sets a new record low:
* Even without taking inflation into account, this recovery has seen the slowest growth in weekly earnings of non-production supervisory workers, a good indicator of actual income of the majority of the American workforce.
* Once inflation is accounted for, weekly earnings growth for the entire recovery is negative, a new record low.
* Consequently, average monthly growth of total wages and salaries also reached a record low in this recovery, after inflation is accounted for.
During this recovery, wages grew particularly slow. Nominal and real weekly earnings show the slowest gains in any recovery since the early 1960s – the earliest for which data are available. Combined with slow employment growth, this was also the recovery with the slowest growth in total salary and wage payments.
Sources: Bureau of Labor Statistics, Weekly Earnings of Non-Supervisory Production Workers, Bureau of Labor Statistics, Consumer Price Index, Bureau of Economic Analysis, Personal Income and Its Disposition, and author's calculations.
Sustainable recovery questionable:
* Consumption growth, which was one of the most important components of the recovery so far, showed its slowest performance since the recession in the second quarter of 2004.
* Personal consumption expenditures declined by 0.9 percent in inflation-adjusted terms in June, the sharpest drop in almost three years.
* Reflecting the emerging weakness in consumption is the fact that the retail sector lost 19,000 jobs in July.
* The economic boom was also sustained by a housing boom. However, household spending on new construction, including renovations, declined by 0.6 percent in June.
Consumption growth has been a major force propelling growth forward. In June 2004, consumption saw its largest decline in almost three years, raising worries about the sustainability of the strength of the recovery.
Source: Bureau of Economic Analysis, Personal Income and Its Disposition.
In weak labor market, households getting squeezed by higher costs:
* Everywhere households look today, their costs are rising. The costs of housing – renting or owning a home – have gone up by 7.5 percent since the start of the recovery, health care costs by 11.8 percent, and energy costs by 34.1 percent.
* At the same time that prices are rising, mortgage rates are rising while households have already incurred record debt levels. Consequently, the debt service burden of households – the share of their disposable income dedicated to repaying their debt in each quarter – has been at or above 13 percent for the thirteen quarters ending in March 2004. This was the first time since the early 1980s that the debt service burden exceeded 13 percent.
* Interest rates are expected to rise further. In June 2004, the Federal Reserve raised its key interest rate for the first time in four years. And mortgage rates reached their highest level in almost two years in June 2004.
An important aspect of this recovery has been a refinancing boom based on low mortgage rates. Since April 2004, mortgage rates have been rising again, thereby raising worries about a possible end of the refinancing boom and the sustainability of the recovery.
Source: Board of Governors of the Federal Reserve System, Release H.15 Selected Interest Rates.
The president's tax cuts were inefficient to promote strong job growth:
* Although not originally intended as an economic stimulus, the president has promoted his massive tax cuts as the primary mechanism that has helped the labor market. However, even when the economic recovery hit its strongest pace in the third quarter of 2003, less than 20 percent of that growth was attributable to the president's tax cuts, according to economy.com.
* Many economists agree also that the large deficits created by the massive tax cuts of the past few years will likely slow down economic growth and living standards in the future.
Households cannot count on help from President Bush:
* President Bush has either ignored or downplayed the economic weakness of the past few months. On July 31, he said, according to the New York Times, that "America has a strong economy, and we are growing stronger every day ... This president and vice president are determined to keep moving forward with a comprehensive pro-jobs, pro-growth agenda." And on August 5, he was quoted in the Los Angles Times as saying, "listen, I understand something about the job base in Ohio…People are skittish. But there's jobs being created."
* Instead of focusing on policies that could help to boost job creation or that could aid those still struggling in the labor market, the administration has focused on its new overtime regulations, scheduled to go into effect in the second half of August. According to the Economic Policy Institute, an estimated six million workers will lose overtime protections under the new regulations.
* Recently, President Bush has also indicated that he wants to weaken overtime pay even for those workers who still have it. The proposed regulations would make it easier for employers to force their employees to take time off instead of giving them their required overtime pay.
* The White House continues to promote making the president's tax cuts permanent as its top priority to keep the economy moving forward. Such a policy will widen the nation's deficit without adding significant stimulus to the economy and the labor market, as the experience of the past few years has shown.
"Ice berg! Right ahead!"
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