Wednesday, January 18, 2006

2005 Economic Wrap-up

Last week I wrote a short summary of December's Employment Situation following its release by the Labor Department. This post will elaborate and include a look back at the performance of the domestic job market as well as the newly released CPI and Real Earnings (PDF file) numbers. I will conclude with a full economic wrap-up along with an outlook into this year.

The aforementioned December Employment Situation was yet another case of job growth and decreasing unemployment. Payroll employment jumped 108,000 in December bringing the year's total to an increase of 1.9 million, an average of 158,000 per month. Furthermore, the economy has added 4.6 million new jobs since the 2003 tax cuts at a monthly rate of 149,000. Nevertheless, the 2005 calendar year is continually portrayed as a terrible year for the American economy.

Clinton certainly was blessed with a thriving economy during his presidency, but any sane economist will attribute much of that growth to the "I.T. Revolution". The ensuing "dot-com bust" of 2001 has weighed down the Bush economy, which is only now seeing itself grow at its full potential. According to the historical prices of the Dow Jones Index, the main U.S. stock market peaked during the week of May 21st, 2001 at 11,436.42 and bottomed out less than four months later at 7926.93 during the week of September 10th. This represents an astronomical drop of 44.3% in a market that's relatively stable when compared with other worldwide indices like Japan's Nikkei (which has dropped nearly 10% in the last two days and is notorious for bursts upwards and cliff-dives downward).

When a stock's price plummets, profits usually turn to losses and workers tend to be laid off in droves. Following the stock market crash in September 2001, the job market lost 1.7 million jobs over the next 21 months until Bush's supply-side tax cuts halted the drop in May 2003. After an average loss of 82,000 jobs per month during that 21-month span, the job market has not suffered a single loss since, even through the Katrina crisis. The market recently eclipsed 11,000 for the first time in nearly five years, and after bottoming out below 8,000 again in April 2003, the stock market hasn't looked back since the tax cuts, gaining 3,000 points to get itself back into familiar (five-digit) territory.

And now, onto the newest numbers: CPI and Real Earnings. The Labor Department released both publications this morning, and both offered predictably positive numbers. The Consumer Price Index shedded another tenth of a percent following the largest CPI plunge in nearly half a century. Also, real average weekly earnings (real meaning adjusted for inflation) rose for the third straight month, this time one tenth of a percent. Neglecting the Katrina-affected September drop of 1%, real earnings jumped by nearly the same rate. Nevertheless, the full story remains that earnings kept pace with inflating consumer prices while liberal pundits lied their filthy butts off day in and day out saying workers were seeing real wages drop.

The typical response from lefties is that even if wages keep up with inflating prices, benefits don't. This is true ... of pensions! Taxpayer-funded benefits are a far cry from a 401K plan which returns about 10% for most workers. My 401K saw a 10% ROI (return on investment) in 2004 and a 9% ROI this past year. I haven't even cracked the two-decade mark and yet I've stocked up $6,000 for retirement. Imagine what a blue-collar worker, making $50,000/year, could accumulate simply by investing 10% of their paycheck in a retirement plan. $5,000/year with a 10% ROI over thirty years comes out to a cool $165,000. Add in the typical employer-matching option (most companies match worker contributions into 401K plans) and the figure doubles to $330,000. But don't expect liberals to like that approach, after all that's "risky" (if you take their response to Social Security reform, for example).

Back to the CPI, December's drop puts the 2005 increase at a high, but acceptable, 3.4%. Remember, core inflation only increased at 2.2% over the year. The extra 1.2% is made up almost entirely by a 17% burst in energy prices over the year. Not to worry, especially if ANWR drilling is approved and with the discovery of massive oil stores in Canada (the oil sands project).

However, don't expect the hypocritical Democrats to go anywhere near ANWR approval. As much as they moan and groan about moving toward "energy independence" (even thought that is an oxymoron, we will always need foreign sources for some percentage of our energy needs), liberals would never vote for something so "detrimental to the environment". Which is exactly why there hasn't been a nuclear power plant built in 25 years. After all, just look at Three Mile Island! Oh, never mind, nothing happened. Meltdown? Nope. Dangerous radioactive gases leaked? Nope. The entire incident was controlled with no external damage to the surrounding environment.

With 4th-quarter GDP numbers scheduled for a January 27th release by the Commerce Department, some are worried about the effect a slowdown would have on 2006 GDP growth. Many economists are predicting somewhere between 3.0 and 3.5% GDP growth this year with a minority of forecasters saying GDP growth will fall to 2.5% and unemployment will rise to 5.5%. Well if we are to believe in a "business cycle", the latter wouldn't be a big surprise. Following an expansion like we have seen in recent years, businesses tend to contract, resulting in higher unemployment. I will only even begin to approach the low GDP growth outlook if Congress fails to extend the tax cuts past 2008. Even though a rejection of the extension doesn't mean that rates will go back up, the bad news will send investors in a frenzy to get out of an impending bear market.

I predict, with relative uncertainty, that GDP growth will eclipse 3% if the tax cuts are extended and will fall below the mark if they are not. Also, I do believe unemployment will crawl back over the 5% mark soon enough. As the natural rate usually lies somewhere around that number, the cycle of expansion and contraction should bring it back above it for a short period, but only slightly. I see unemployment peaking at around 5.1% or 5.2% during the next 12 months. For historical proof, look at the past 25 years of monthly unemployment rates. It peaked in 1982 at 10.8% and proceeded to a low of 5.2% between 1989 and 1990. Then it jumped back up to 7.8% in 1992 and fell back down to 3.8% in 2000. After the stock market crash, unemployment rose to 6.3% in 2003 and fell back down to its current rate of 4.9%.

While the 1970's and 1980's were volatile times economically, the current economy is more stable, therefore a rise above the natural rate from the current rate of 4.9% shouldn't be very high. Otherwise there is still wiggle room in the mid-4% range.

I remain optimistic for a prosperous 2006 and expect the Dow to approach 12,000, perhaps eclipsing the mark for the first time ever (it peaked at 11,980.34 in July 2000). Remember conservatives, pessimism is for liberals! However, don't meddle in optimism without a dash of realism as well. A purely optimistic view would put the American economy in hyperspeed along current trends, but realistically the economy must slow down sooner or later. I hope it turns out to be later, but only time will tell.


Anonymous said...

If you attribute the economic prosperity in the Clinton years to the Dot Com boom, you should also attribute the Dot Com boom to the Clinton Administration. Way to try to dodge that.

Jeremy said...

Name one reason why ... then allow me to tell you why you're wrong.