2004 Economic Report Of The President

2004 Economic Report of the President

Av Mellen

Employment

The unemployment rate decreased this year, and employers created over 2 million new jobs. In December 2004, the unemployment rate was 5.4%, and is expected to drop closer to full employment/unemployment levels at 5.3% by the end of 2005. This reverses the previous unemployment rate trend for the Bush administration, which culminated in a peak unemployment rate of 6.3% during the second quarter of 2003. The service sector experienced the bulk of this expansion, providing 85% of total job growth. This is consistent with the 83% market hold that the service sector holds on the economy. The goods-producing sector provided 15% of total growth, consistent with its 17% hold. Growth was observed particularly in construction, which may be due to significant increases in new home purchasing credited to low mortgage rates. (an average of 5.8% for 2004)

Nonfarm payroll employment grew at around 180,000 per month during 2004, and the administration predicts similar growth - though slightly diminished at 175,000 - during 2005.

Productivity is also on the rise, with nonfarm productivity growing at a 4.2% annual rate since the peak of the first quarter of 2001. This complements the previous gain of 2.4% annual growth rate between 1995 and 2001. The cause for the 1995-2001 expansion is murky, as is the cause of the current boom. This is particularly surprising - and even more inexplicable - considering the dot-com crash of 2000.

Wage rates increased steadily during the year but were hampered slightly by rising inflation, which I will cover on the next page.

Inflation

Reversing the dropping interest rates of 2003, interest rates climbed during 2004. The Consumer Price Index (CPI), which measures the average cost of all goods and services, increased by 3.3% during the entire year of 2004. Contrast this with the lesser rate of 1.9% increase during all of 2003. These rising interest rates may be a direct cause of the lowering unemployment rates and raising wage rates.

Much of the growth was observed in the energy sector, with consumer energy prices rising 17% during 2004.

As I said, two factors that contribute to the rising inflation rate are falling unemployment rates and rising wages. Since I already covered unemployment on page 1, I will delve into wages here. Private-sector hourly compensation grew 3.8% during 2004, according to the Employment Cost Index (ECI), which measures the relative changes in employer costs. As I said, this is slightly lower than the 4.0% increase observed in 2003. Wages and salaries rose 2.9%. Employer benefits increased by 6.9%.

While this rate of inflation is within acceptable limits, the architects of the U.S. economy will have to be on the lookout for further increases in the CPI. If inflation continues to increase in this fashion, eventually we may reach the point where wages are outstripped by inflation, making the AMOUNT of goods and/or services that one could purchase with the American dollar decrease. This would make it advantageous for foreign companies to increase imports to the United States at relatively cheap prices, which I will cover in the next section. In that case, the administration may need to institute