March 16, 2005
Apparently, almost all forecasters are raising their
estimates for U.S. economic growth for this quarter and this year.
My own estimates show growth of 4.1 percent for this quarter.
The year should average a 3.8 percent gain.
Actually, the employment gains reported a week ago were
only half strong. Jobs grew a
vigorous 262,000 and temporary employment agencies found placements for more
than 38,000 new workers in the latest month.
Those were the good results.
On the negative side, the workweek showed no change
(the manufacturing workweek actually declined) and the average worker had no
wage gains. Indeed, purchasing
power is now falling more than a percent per year for the average worker.
While tax rebates are unusually strong, they appear to
be heavily concentrated in the sales tax states, such as Florida and Texas,
where those who itemize have a newly restored deduction (for two years).
In most other states, including Georgia, taxpayers will not have
additional reductions in tax payments, as they enjoyed in the past few
To further rub salt in the consumers’ wounds, gasoline prices will probably reach record levels this summer, while wages will hardly budge. Furthermore, rising long term rates will end any further refinancing of mortgages. Overall, the household sector will experience a hundred billion dollar slowing in purchasing power from the past two years.
At the same time, President Bush is trying to eliminate
154 federal programs and ramp down the military spending that was pushed up
to provide relatively safe elections in Afghanistan and then Iraq.
He will not fully succeed in restricting the growth of government,
but government growth clearly will be smaller than in the past few years.
While tax and spending efforts are declining, the
Federal Reserve continues to pursue a policy of rising interest rates.
Until recently, that policy did not deter much economic activity,
because long term rates stayed low. Unfortunately,
that no longer is the case.
In June of 2003, the ten year government bond yielded
less than 3.2 percent. After
subsequently rising, the yield then fell back to 3.6 percent in March of
2004. This February, the yield
could only be sliced to slightly under 4 percent following another jump in
rates during last fall.
Any financial trader will tell you this is a pattern of
rising lows. Thus, the long
term interest rate trend is upward, even if we have further dips following
upward spurts in yields.
Now, if I asked any of my former students what they
would do to their forecasts if tax reductions were fading, government
spending growth was slowing, energy prices were jumping faster than wages,
and interest rates were rising faster than inflation (as certainly is
happening for short term rates), they would not pass the question without
saying that they would be cutting their estimates.
So why is nearly everyone’s forecast going up?
Some clearly have misread the strength in the latest
employment report. But others
are surprised by strong manufacturing orders and strength in capital
spending. I increased my
estimates because current trends are robust.
However, those robust trends are not balanced.
In January, manufacturing inventories grew faster than sales.
Because of new technology, we usually need fewer inventories to
support a given level of sales.
Housing is strong, but the inventory of unsold houses
is beginning to rise (from 3.9 months a year ago to 4.7 months today).
Housing prices are beginning to stall as well.
One month is not a trend, but the median house last month sold for
less money than the comparable measure did a year ago.
Is the housing correction about to begin?
The consumer still responds to deals but the savings
rate is now below 1 percent. If
stock prices were surging and mortgage refinancing was adding purchasing
power to the meager wages received by workers, I would not be concerned. Now, I look at chain store sales every week that gasoline
prices spurt and stock prices stall. (Chain
store sales were soft last week, for example.)
In short, I have raised my forecasts for this year because of the head of steam that is pushing this economy. But the sources of that steam are cooling rapidly. Thus, I am cutting my outlook for next year.