U.S. Economic Update               

December 2004

By Chris Engle and Daniel Kah

AngelouEconomics

Click here to download our Winter '04 U.S. Chartbook.

After two years of poor economic performance and months of election wrangling over the loss of jobs during Bush’s first term, all eyes are now on Alan Greenspan as he navigates the slow return of growth and stability to the U.S. economy. Most indicators show substantial improvement over last year, but the slow pace of recovery has made many economists and observers disappointed. Big-issue concerns prevent us from getting too optimistic about our return to high growth. Outsourcing’s effect on future job growth, continued offshoring of traditional manufacturing, and rising energy prices have put a damper on forecasts.

First, let’s take a look back: Just how bad was the recession? After the longest period of growth in U.S. history, the national economy suffered a recession in 2001, weakened by a steep decline in IT spending and a stock market crash in 2000. The outlook for the economy was further damaged by the September 11th attacks, corporate scandals, and numerous earnings revisions. The final toll of the recession was severe: 2.7 million jobs were lost over 2 years, personal bankruptcies grew 30%, and government tax revenue fell 10%. Compared to other recessions in this century, the “Y2K recession” was brief, but a return to job growth has taken far longer.

Today, the economic picture is much brighter. The Fed did much to prevent an even deeper recession by lowering interest rates to a 50-year low, which fueled strong demand for new housing construction and supported higher than expected consumer retail sales.

National GDP rebounded well in 2003, increasing 4.4% and continuing to grow at a healthy pace through the first half of 2004. The consensus GDP forecast from the Wall Street Journal’s panel of economists predicts average growth of 3.8% over the next 12 months. The non-partisan Congressional Budget Office is predicting similar growth levels through 2007.

While GDP has rebounded, job creation has been slow to follow. In fact, job creation has been downright disappointing. While the recession was declared officially over in late 2001 after 8 months, job creation did not return until two years later. Only in the fourth quarter of 2003 did employers begin to add jobs in earnest. While the last 12 months saw the creation of 1.6 million jobs, the 2-3 year lag has meant that millions of jobs were not created that we could have expected from a typical recovery. Only next year will the U.S. job
base return to its pre-recession level.

Despite the poor job market, consumer spending has held strong throughout the recession. In fact, consumer spending is the remarkable story of this recession. Its growth never fell below 4% despite flat-to-negative household income growth for two years. Today, incomes are rising at their historical average and consumer confidence has returned to par. After reaching a low of 61 in early 2003, consumer confidence surpassed 100 in July 2004. The U.S. will build 2 nearly million homes this year, the highest level
in 25 years.

Retail sales are now growing at 6% annually. In 2004, sales at home and garden stores, electronics merchandisers, and restaurants increased 10% over the previous year. Sales of groceries, sporting goods, and autos increased just below 5%. Sales of durable goods have been strong, particularly in the automotive market. Vehicle sales growth turned positive in 2004 after 3 years of declines.

Business investment has also turned positive. In fact, early 2003 saw a rebound in investment in equipment, and real estate construction followed 6 months later. U.S. exports have been growing since the middle of last year.

The stock market began its recovery much earlier than the job market. The Dow and NASDAQ grew considerably in 2003, but flattened in 2004. After a strong 70% gain in 2003, the Dow Jones traded within a small band between 10,000 and 10,500 over the past year. The index is still 1,000 points off its peak in December ’03, but is currently trading 8% above its January level. The NASDAQ also experienced strong growth in recent months, but it is still down 60% from its peak of 5,000 in March 2000.

While the U.S. economy appears to be on a steady growth recovery, several areas should be monitored for their dampening effect: higher interest rates, higher energy prices, rising consumer debt, underperforming job creation, and a still unclear outlook for the technology market. A positive surprise may come in March of next year when the Bureau of Labor Statistics revises its employment estimates. Most expect an upward revision of several hundred thousand jobs – adding a quarter to half percentage point to growth. Start-ups and the self-employed workforce may prove to be the hidden reason for future growth revisions.

Overall, the U.S. economic climate in 2005 should deliver the best job growth we’ve seen in four years.

For a closer look at today’s U.S. economy, review our Winter ’04 U.S. Chartbook.