For millions of Americans looking for a job, economic growth must seem like a mirage. They see the economy expanding and the hopes of new jobs being dangled before them, but when they reach out to get a job, nothing is available. The economy remains strong due to continued increases in consumption, investment, and government spending, and due a declining trade deficit. However, wage and salary income has not kept pace with consumption, reflecting the weak labor market, requiring households to borrow more.
Today's advance estimates for the gross domestic product (GDP) show that the economy continued to grow at a solid pace with 4% in the fourth quarter of 2003. Thus, 2003 was the fastest growing 12-month period, with 4.3%, since the four quarters ending in June of 2000.
Coming off the highest quarterly growth in almost twenty years, all sectors of the economy contributed to another quarter of respectable gains. Consumption, investment, and government spending expanded, while the trade deficit shrunk. Economic growth is more broad based than just a few quarters ago, with all economic sectors contributing, which helps to stabilize and solidify the recovery. To maintain this momentum, though, the labor market has to improve. Otherwise, consumption, which comprises the vast majority of the economy, will not be able to grow at a strong pace, possibly putting a damper on growth in the medium-term.
Households increased their spending both for consumption and for their homes. Consumption gained 2.6% in the fourth quarter after increasing by 6.9% in the third quarter, and spending on new homes and renovations to existing homes grew by a surprisingly strong 10. 6%, following a stunning 21.9% in the third quarter. Much of the spending increases, though, still reflect a continued willingness by households to borrow more money.
Business investment also expanded for the third quarter in a row. After the recession and the recovery saw the longest decline in investment spending since WWII, the increase in business investment gives rise to the hope that more hiring will be forthcoming, too. In the fourth quarter, business investment grew by 6.9%, after rising by 12.8% in the third quarter.
Further, government spending grew, too. Federal government spending rose for the third quarter in a row, with a meager 0.7%, which reflects an increased in defense spending by 1.8%, and a decline in non-defense spending by 1.6%. In comparison, the fiscal crisis in the states continues to take a toll on spending by state and local governments, which saw another quarter of comparatively low growth with 0.9%.
Finally, the shrinking trade deficit also contributed to solid growth. This is the first time since the second half of 1991 that the trade deficit has shrunk for two consecutive quarters. In inflation adjusted terms, the trade deficit reached its lowest level since the third quarter of 2002. Relative to GDP, the trade deficit also had reached its lowest level in six quarters. The declining dollar, which typically affects the trade deficit with a lag of 12-18 months, and which began its slide in early 2002, appears to have finally resulted in a smaller trade deficit. Importantly, the decline in the trade deficit came as a result of improved exports and fewer imports. Exports growth was very strong with 19.1%, compared to continued solid gains in imports with an 11.3% increase.
Yet, while the economy is expanding at a strong clip, the labor market is still in the doldrums. In December, the U.S. economy added a full 1,000 jobs – or 20 jobs in each state. For the past five months, employment increased by an average of 56,000, well below the approximately 150,000 jobs the economy needs every month to absorb population growth.
The weakness in the labor market is also reflected in today's GDP report. In inflation adjusted terms, wage and salary income grew by only 0.3% in the fourth quarter, following an increase of a mere 0.2% in the third quarter. To maintain consumption, households increased their debt. Consumer credit, i.e. credit card debt and loans for cars or furniture, among other things, reached a new record high of 39% of wages and salaries in October and November. Without solid improvements in employment and wages in the coming months, delinquencies and defaults, which are already high by historical standards, will likely remain high and possibly increase further.
While millions of Americans wait for economic growth to trickle down to them in the form of more and better jobs, policymakers should not stand idly by. The labor market slump is real, and those who cannot find the jobs they are looking for need immediate help. Congress should thus expand unemployment benefits for the long-term unemployed. The Center for Budget and Policy Priorities reported yesterday that an estimated 375,000 unemployed are exhausting in January alone. Similarly, policymakers should not jeopardize the renewed strength and stability of economic growth by continuing to expand irresponsible fiscal deficits through large tax cuts? for the richest households. Those who have been waiting for years for the promise of more jobs to become a reality deserve responsible actions by policymakers that will not jeopardize economic growth in the near future through higher interest rates and less investment.
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Year-on-year change in real GDP, 1948 to 2003
The year-on-year change in inflation adjusted gross domestic product (GDP), which fluctuates less than quarterly growth rates, has gradually increased for the past four quarters. In the fourth quarter of 2003 it reached its highest level since the second quarter of 2002.
Source: Bureau of Economic Analysis, National Income and Product Accounts, www.bea.gov
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Trade deficit relative to GDP, 1947 to 2003
Since 1995, the trade deficit relative to gross domestic product (GDP) has eroded. In the last few quarters of 2003, the situation reversed slightly. In the fourth quarter of 2003, the trade deficit relative to GDP had shrunk to its lowest level in a year and a half.
Source: Bureau of Economic Analysis, National Income and Product Accounts, www.bea.gov
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Wages and salaries relative to GDP, 1947 to 2003
For the past eleven quarters, total wage and salary income has declined relative to GDP. This is the longest decline since WWII. It is also ends the largest decline over any three year period in the post-war period with a 3.6 percentage point decline relative to GDP.
Source: Bureau of Economic Analysis, National Income and Product Accounts, www.bea.gov
Dr. Christian Weller is a senior economist at the Center for American Progress.