RL30329
Current Economic Conditions and Selected Forecasts
November 15, 2004
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Summary
U.S. real GDP has been positive for 12 consecutive quarters, and the economy is considered to be in an "expansion" phase. As of the third quarter 2004, real or inflation-adjusted growth was nearly 10% above its previous high near the end of the 1991-2001 expansion. Real growth at 3.7% in the third quarter of 2004 was somewhat above the 3.3% rate achieved in the second quarter, but below the 4.5% rate achieved in the first quarter (all at annualized quarterly rates). All are down from the 7.4% rate achieved in 2003:3Q. Even during the 1990s expansion, the pace of growth was rarely over 7%. Yet the rebound in growth has not translated into higher payroll employment, and many call this a "jobless recovery." Payroll employment, despite recent gains, is only 1,146,000 above the level prevailing at the end of the recession (November 2001). The unemployment rate rose to a high of 6.3% in June 2003; it has since declined and now (October) stands at 5.5%. During the first 10 months of 2004 it has varied between 5.4% and 5.7%. These are well above rates in the second half of the 1990s. There are however positive elements of the economic picture: (1) A pick-up in output at the same time as employment is declining means that productivity (or output per worker) is increasing. As we saw in the 1990s, productivity growth is the key to raising our standard of living and is not necessarily associated with weak labor markets over time. We eventually experienced both rapid productivity and strong employment growth as the recovery broadened and deepened throughout the decade. In the short run while adjustment is taking place, however, there is a human toll from the continuing payroll employment losses. (2) The inflation rate, measured by the CPI, accelerated over the first half of 2004, rising at an annual rate of 4.9%. However, this was largely driven by rising energy prices. Over the past three months (June-September), the inflation rate was only 0.6% (annualized quarterly rate). While most economists did not expect the sizzling 2003:3Q pace to be sustained, they anticipate that growth will settle down to around 4% over the next year, still above what is considered to be the long-run potential rate of growth. However, the unemployment rate is expected to show only a modest change as long as businesses are able to improve profitability through increased productivity. Inflation is expected to remain low while considerable slack remains in the economy. Fiscal and monetary policies have both been eased since 2001 and the easing has continued into this year. They are having a positive effect on spending. However, on June 30, August 10, September 21, and November 10, the Federal Reserve made a modest shift to tighten monetary policy. The external deficit is large and expected to remain so. This report will be updated monthly.
