Understanding the economy is tricky, at best. Having said that, the current economy is unusually tricky, even for an economy.
In attempting to manage this business, I have had a hard time understanding where we are in the economic cycle over the past few years. Are we in a recovery and, if so, why doesn’t it feel like a recovery? Does the recession persist? Why is unemployment as high as it is if the economy is expanding?
Although the economy can really only be understood with hindsight, I got some insight into what’s going on recently at the 11th-annual Mississippi Economic Outlook Conference, which is conducted by the Mississippi Institutions for Higher Learning. There were presentations covering the major aspects of the state’s economy and I won’t try to summarize all that was said. Rather, I’ll pick and choose some tidbits that might be helpful in understanding where we are and how things might go over the next year or so.
Most of my comments are lifted from a presentation by Nigel Gault, managing director of the U.S. Economic Service. I hope you find them as interesting as I did.
The U.S. expansion has cooled. Growth in the gross domestic product (the value of everything we make and do) crashed in 2001, rose modestly in 2002, crashed again the first half of 2003 and then took off during the last half of 2003 and early 2004, reaching a high-water mark of 6% during the first quarter of this year.
Forecasts for the remainder of this year and the next few years shows GDP growth lagging around 4.5%. This is not optimistic; however, economists are not an optimistic bunch. Nonetheless, it looks like the bumping and grinding recovery is over and we’re in for several years of ho-hum, modest growth economic performance.
Silver lining of employment
Though the overall expansion has slowed markedly, employment gains have barely begun to recover from the recession. I hesitate to say this on the eve of our presidential election, but the statistics indicate the U.S. still has 940,000 fewer jobs than in March 2001.
There’s a silver lining to the employment cloud. Though the economic expansion appears to be cooling, job growth is beginning to take off. And, it appears that the number of jobs in the U.S. will continue expanding at the modest, but substantially improved, rate of 1% to 2% annually over the next couple of years. The last quarter of this year is expected to see the highest job growth rate since the end of 2000. Good news, indeed, but probably too late to impact the upcoming election much.
Oil — great big downer
Oil prices are a bummer for the economy. Higher oil prices have caused economists to cut their growth forecasts. There doesn’t seem to be a gas shortage in the foreseeable future, just higher prices.
Oil is such an integral part of our economy that the higher prices affect a multitude of products and services. The price increases will kick inflation up a notch or two, but nothing to get overly concerned about.
Whose turn is it now?
Somebody else is going to have to pick up the economic ball and run with it. Consumption and housing have been toting the load for this recovery, but they have done about all they can do. Tax cuts and low interest rates have spurred the housing industry to heights previously unscaled, and we have consumed everything in sight.
Consumers are stretched to the breaking point with the personal saving rate a close to zero. Not known as a nation of savers, we have outdone ourselves. From a high savings rate of almost 5% of disposable income in 1998, we had dropped to a low of zero by the end of 2001. During 2002 and 2003, the savings rate recovered slightly, ranging between 1% and 3% before beginning the current plunge to zero. This is no way for to prepare for retirement.
Watch out for that deficit
The federal deficit is troubling. It results from two easily understood factors: we’re collecting too little in taxes and spending too much.
I believe it was Abraham Lincoln who said, “there’s too many folks in the wagon and not enough pushing.” Federal tax receipts have fallen from about 21% of Gross Domestic Product in 2000 to about 16% in 2004. That may not seem like much, but we’re talking about trillions of dollars and 5% is big bucks.
On the expenditure side, the federal government is spending about 20% of GDP and that number is forecasted to stay the same for several more years. This is pretty elementary math. If we collect 16% of GDP and spend 20%, we’re going to have a really big deficit.
What do the presidential candidates say about this deficit problem. President Bush wants his tax cuts made permanent and to strictly control non-defense spending. Senator Kerry wants to rescind the tax cuts for the affluent and spend the savings on improving health and education. Neither seems overly concerned about solving the deficit problem.
Oh well, I don’t suppose you can get elected president by telling folks with a zero personal savings rate that the country needs to tighten its belt and clean up the deficit mess.
Thought for the Moment— Be sure you know the condition of your flocks, give careful attention to your herds; for riches do not endure forever, and a crown is not secure for all generations. — Proverbs 27:23
Joe D. Jones, CPA, is publisher of the Mississippi Business Journal. Contact him at firstname.lastname@example.org.