Release of two new pieces of economic data showed that the economy, while growing, is still below expectations.

Release of two new pieces of economic data showed that the economy, while growing, is still below expectations.

Gross Domestic Product

Gross domestic product (GDP) grew at an annual rate of 4 percent in the final quarter of 2003. This was less than half the 8.2 percent growth rate in the third quarter, and below economists' expectations (CNN reported an expected rate of 5 percent). For 2003 as a whole, the economy grew at a 3.1 percent rate, which is less than the 3.3 percent average growth rate over the past 10 years. In the recovery from a recession and during a period of extraordinarily stimulative monetary policy, we would normally expect much stronger economic performance.

Employment

Employment data for January showed an increase of 112,000 jobs, and a small dip in the unemployment rate to 5.6 percent. While positive, size of the job growth is below the level needed to keep up with population growth, below the level needed to create a healthy labor market, and below the predictions put forth by the administration.

JobWatch.org shows that job growth from June to January was 1.8 million jobs short of the administration’s predicted effect of the tax cut.

The weaker than expected job numbers, together with the mild GDP report paints a picture of an economy that continues to muddle along without a clear direction.

In addition to their regular release, the Bureau of Labor Statistics also published a revision to their jobs numbers for the past year. The revisions incorporated new data as well as updated methods for estimating the “births” and “deaths” of firms. The following figure shows the employment picture remains essentially unchanged in 2003, with a revised total 147,000 jobs lost from January to December 2003.

The Fed

The economy has greatly benefited over the last year from an accommodative Federal Reserve (Fed), which has generated a strong housing market and pumped large amounts of money into the economy through loan refinancing.

However, the Fed cannot hold interest rates down forever, especially given pressures from the exploding budget deficit and the falling value of the dollar, and will likely begin to slowly raise rates by the end of the year.

After a two-day meeting of the Fed’s decision-making group, the Federal Open Market Committee (FOMC) released their usual policy statement. While they chose to again keep rates unchanged, they removed a line from previous statements that said “policy accommodation can be maintained for a considerable period.” This omission signaled to observers that the monetary policymakers are closer to taking their foot off the gas.

With the Federal Reserve backing away from the stimulus table, the current direction of fiscal policy – which is providing little effective stimulus in the short-run – continues to put at risk the health of the economy. This is especially true in the long run as surpluses have given way to massive structural deficits.