It appears that 2004 will be the first completely good growth
year we’ve had as an economy since 2000. Supported by tax
cuts that have increased the spending power of most Americans, the
economy is finally pulling out of the doldrums that becalmed it in
the first years of the century. True, the large job losses of the
past two years have not yet been made up — it’s possible
that George W. Bush may be the first president since Hoover to end
a term with fewer jobs in existence than when he started
it — and it appears they will not likely be made up in 2004.
But there appears to be progress. The last economic report of the
old year contained an increase in factory orders and the first of
the new year confirmed this, leading to speculation that companies
will soon start hiring more workers. That will certainly happen
sometime during the year, and it will spur growth. Growth itself
soared to 8 percent in the third quarter of 2003 and stayed high at
4 percent in the fourth quarter.
The question is whether it will be fast enough or large enough
to counterbalance five drags on growth that will be present in the
economy this year.
First, interest rates will rise. This is inevitable
either because the economy is growing or because the federal
deficit is rising. Recently, the fed has kept rates pretty well
stable, and at their March meeting reaffirmed their concern over
job creation. They have taken no policy actions in over a year. The
rhetoric coming from the Open Market Committee meetings, however,
indicates that the members are looking carefully at the recent
upsurge in growth. Although they may not touch interest rates for
the remainder of this year, they are probably looking for the
opportunity to raise them. Additionally, the federal deficit is
ballooning, and is now estimated at nearly a $0.5 trillion for the
fiscal year. This means the federal government will be an active
borrower in financial markets, increasing demand and raising rates.
Since foreign borrowers hold a substantial portion of our debt (and
need to be convinced to hold even more), an interest rate rise is
even more likely.
Second, housing is already slowing down and will continue to
do so in 2004. This is also inevitable as rates and prices rise
and some of the demand for homeownership is satisfied. The booming
housing market that we have enjoyed for more than five years is
clearly not over quite yet. There is a strong demographic push for
home ownership and the Federal government has made an increase in
the homeownership rate a national priority; witness the recent
endorsement of zero down payment loans by FHA. But, the market has
clearly broken and activity will cool a bit. Prices will also
moderate, and the combined effect will be a reduction in dollar
volume for housing market activity in 2004. Figures from the end of
2003 and early 2004 suggest it has already begun.
Third, job creation has not yet recovered. To match the
growth of the labor force, we need to create 150,000 net new jobs
each month. More workers are coming into the market than there are
new jobs. Even in the past four months, when jobs have been
increasing, the average growth has only been 90,000. The numbers
for January and February were far below that average and were
extremely disappointing relative to both expectations and the needs
of the market. The drop in the unemployment rate is misleading
since it reflects numbers of workers dropping out of the labor
market more than it demonstrates increases in employment.
Fourth, energy prices are soaring. Some forecasters are
predicting gasoline prices at $3 per gallon or above this summer. This
has three negative effects. First, it can increase inflation
generally. For example, as fuel costs rise, so do airline fares and
shipping costs. Increases in inflation lead to increases in
interest rates. Second, consumers find they can buy less of other
goods when they pay more for gasoline. This slows growth. Finally,
consumer confidence suffers when a high profile commodity like
gasoline increases in price. This leads to declines in consumption
and reduced growth.
Finally (and here’s the wild card), we don’t yet
know the full impact of productivity growth on the demand for
labor. Labor productivity has been growing faster than the
economy as a whole. This means output growth can be accomplished
without increasing employment. If this relationship continues
through 2004, employment growth will continue to lag and the
recovery will be weak. On the positive side, productivity growth
appears to be slowing.
So we now have a race. Can the rebound in the economy offset the
drags being imposed on it? Unlike most forecasters, I’ll not
tell you how the race will end. Rather, I’ll just suggest
what to watch and let you reach your own conclusions. To handicap
the race, keep your eye on employment and on the other four drags.
These four variables will tell you much about what’s to come
in 2004. If interest rates rise by more than a full percentage
point by the summer, the recovery is done-any less and we’re
OK. The corresponding threshold numbers are a 10 percent decline in
housing dollar volume, 150,000 net new jobs per month, gas prices
holding above $2.75 per gallon into the fall and equal growth rates for
productivity and GDP. Place your bets, ladies and gentlemen: the
horses are at the gate!
John Tuccillo, Ph.D. is an economist, consultant and author.
He works with a variety of companies in the real estate, mortgage
banking and technology industries. From 1987 to 1997, he was chief
economist for the National Association of REALTORS®. His latest
books are New Business Models for the New Economy, published by
Dearborn in 2002, and How a Second Home Can be Your Best Investment
(with Tom Kelly), published by McGraw-Hill in 2004. His web site is
www.johntuccillo.com and he can
be reached at tumler@aol.com.