Current Economic Climate Summer 2004
Information Bulletin
August 25, 2004
The purpose of this bulletin is to provide local leaders with information on key economic trends that help to shape the current economic climate. These trends are significant because they impact the availability of funds for education, health care, and other public services at the national, state, and local levels.
This bulletin is issued twice each calendar year summer and winter and presents information about changes in the gross domestic product, employment and unemployment, consumer prices, retail sales, housing, industrial production, and stock market performance. Other pertinent trends are included as well. In addition, a brief summary of projections for the economy is included. Finally, comments on both the Federal and State budgets are presented. We will continue to issue the regular monthly Information Bulletin on the CPI.
This is the third issue of Current Economic Climate.Your reactions and suggestions on this new series of Information Bulletins are most welcome. Please contact John Yagielski or Neil Foley at NYSUT Research and Educational Services with your feedback and comments.
- Economic activity has rebounded since the downturn of 2001. The second quarter of 2003 through the first quarter of 2004 had Real GDP growth of greater than
4 percent. The second quarter of 2004 Real GDP growth was 3 percent.
- As the national economy has improved, the national unemployment rate has declined from 6.3 percent in June of 2003 to 5.6 percent in June of 2004.
- The June unemployment rate for New York State has remained relatively constant for the last three years: 6.2 percent in 2002, 6.3 percent in 2003, and 6.2 percent in 2004.
- New York State employment in June of 2004 was 8.542 million workers, just slightly above the 8.537 million workers employed in June of 2002 and still below the 8.717 million and 8.718 million of June 2000 and June 2001.
- The manufacturing sector in New York State has lost 400,000 jobs since 1990. During the same period, Health Care and Social Assistance has grown by 339,000 jobs and the Government sector, which includes public education, has remained constant.
- Inflation has risen sharply. The CPI for June of 2004 increased 3.3 percent over June of the prior year. This increase was double the average rate of increase for 2002. Energy costs are a major contributor to the increase.
- The Federal budget deficit is projected to be $422 billion for fiscal year 2004. This is the largest in U.S. history yet, as a percentage of gross domestic product, it is well below the levels of the 1980s.
- Cash receipts are running ahead of disbursements for the first four months of the current New York State fiscal year. This is significant as the state does not have the one-time $2 billion in tobacco settlement money used as revenue last year.
- Alan Greenspan told Congress in July that economic developments in the United States have generally been quite favorable in 2004 lending increasing support to the view that the expansion is self-sustaining.
Economic Trends
Gross Domestic Product
The Gross Domestic Product (GDP) is the sum of goods and services produced in the United States for a given period. It is an indicator of general business activity and economic growth. The most widely followed measure of economic growth is Real GDP, which adjusts GDP to remove the effects of inflation. Chart 1 shows the quarterly changes in Real GDP since 1990.
Chart 1
Gross Domestic Product Quarterly Changes*
* This chart reflects recent revisions made by the Bureau of Economic Analysis for 2001-03.
Source: Gross Domestic Product quarterly changes were derived from the U.S. Department of Commerce Bureau of Economic Analysis.
Chart 1 shows that in 1990 and 1991 there was a marked downturn in the economy.
Throughout the balance of the 1990s, there was considerable growth, quarter-to-quarter, year-to-year, until 2000. During this period, seven quarters exceeded 5 percent growth rates.
The third quarter of 2000 clearly shows a downturn in the economy.
While this downturn ended with the fourth quarter of 2001, growth since then has been lackluster through the first quarter of 2003. Growth in Real GDP has been greater than 4 percent from the second quarter of 2003 up to the second quarter of 2004. The 2004 second quarter Real GDP grew by 3 percent.
National and State Unemployment
The unemployment picture is one of the most troubling aspects of the current economic climate.
Chart 2 is illustrative of what has happened over the last ten years. The chart shows the unemployment rates for June of each year for both the nation and New York State .
Chart 2
June Unemployement Rates
Source: Unemployment Rates derived from the U.S. Department of Labor Bureau of Labor Statistics.
The unemployment rate for the nation was at 6.1 percent in June of 1994, declined to 4.0 percent in June of 2000, rose to 6.3 percent in June of 2003, and declined to 5.6 percent in June of 2004.
The rise and fall in unemployment rates is the inverse of the rise and fall of the Real GDP of the last decade. Simply stated, as economic activity increases (growth in Real GDP), unemployment rates fall, and as economic activity declines (fall-off in Real GDP), unemployment rates rise.
The unemployment rate in New York State for June of 1994 was 7.0 percent, and then declined to 4.6 percent in June of 2000 and June of 2001. Since then, the unemployment rate in New York State has climbed to 6.3 percent in June of 2003 and declined slightly to 6.2 percent in June of 2004.
The rise and fall of unemployment rates in New York State reflects the boom pattern of the 1990s and the downturn of 2001 followed by the uneven performance of the economy since then. It is interesting to note that for almost the entire period covered in Chart 2, New York State 's unemployment rate has exceeded the national unemployment rate.
New York State Employment
Chart 3 shows the number of New York State workers that were employed in June in each of the last 14 years.
Chart 3
New York State Employement
Source: New York State Department of Labor June Figures .
The trend line in Chart 3 clearly shows the decline in employment during the downturns of the early 1990s and 2001.
Employment in June of 2004 has increased to 8.542 million workers from 8.477 million workers in June of 2003. These employment levels are still below 8.717 million workers and 8.718 million workers of June 2000 and June 2001.
Looking at total employment numbers alone does not reveal other important changes in employment in New York State . Chart 4 shows employment trends in New York State in four selected employment industries/sectors.
Chart 4
Employement - Selected Industries
Source: Employment data for these Industries was derived from the N.Y.S. Department of Labor.
Employment in manufacturing has continuously declined over the last 14 years a loss of 400,000 jobs since 1990.
At the same time, health care and social assistance employment grew an increase of 339,000 jobs.
While professional and business services employment has grown over this period, the trend line reflects the downturns of both 1991 and 2001.
Government employment in New York State has remained relatively level over the past 14 years.
Job Trends and Compensation
One of the questions that often comes up as new jobs are created is what are the wages of the new jobs compared to wages of the jobs that are lost. Chart 4 tracks four of the broad categories of jobs in New York State and, with accompanying wage data from the New York State Department of Labor, can offer some help in answering this question.
Chart 4 shows a dramatic loss in the number of manufacturing jobs 400,000 jobs lost since 1990, and significant growth in the number of health care and social assistance jobs grew by 339,000 jobs over this same period.
The most recent New York State Department of Labor data for 2002 shows that the annual average wages for the manufacturing sector was $46,295. Conversely, health care and social assistance had an annual average wage of $34,357. The difference in wages is $11,938. This sector with job growth is paying 25 percent less than manufacturing.
Government has remained relatively constant in numbers of jobs with an annual average wage for 2002 of $42,947. This sector includes public education.
The fourth group on Chart 4 is professional and business services which has had a growth of 197,600 positions with an annual average wage for the sector of $68,726.
Consumer Price Index (CPI)
NYSUT Research and Educational Services issues a monthly Information Bulletin, Consumer Price Index, that reports the latest monthly data on the Consumer Price Index. The Information Bulletin uses data from the Bureau of Labor Statistics, U.S. Department of Labor.
The United States City Average Consumer Price Index for June of 2004 was 189.7 representing an increase of 3.3 percent over the index for June of 2003.
The average increase for the 2002 calendar year was 1.6 percent and for 2003, the average was 2.3 percent. The June 2004 increase of 3.3 percent represents a trend to a higher CPI.
Gasoline price increases have been a major contributor to the increase in the CPI according to the Blue Chip monthly report of July 10, 2004.
Retail Sales
Blue Chip Economic Indicators for July 10, 2004 reports that total retail sales have seesawed over the past four months.
The main cause for this up and down has been the variations from month-to- month in the sales of cars and light trucks. Sales at dealerships plunged 2.1 percent in April, but rose 2.7 percent in May. Vehicle sales have declined again in June.
Blue Chip reports that unit sales of cars and light trucks fell 13.4 percent in June to the lowest level since December 2000. A large part of the background to this behavior has been the mercurial ups and downs of gasoline prices and their adverse impact on consumer spending both for cars and trucks and other purchases.
Housing
Blue Chip Economic Indicators for July 10, 2004 reports that total housing starts fell 0.7 percent in May to an annualized rate of 1.967 million units. The decline is attributable to a decrease in multi-family starts. This decline left the level of single family starts just 1.8 percent below their record November 2003 level. Sales of new single family homes surged 14.8 percent.
Sales rose in all regions, but the strongest increase came in the Northeast where there was a 53.2 percent increase following a period of softness in sales.
It is believed that homebuyers have managed to deal with the rise in conventional mortgage rates by using adjustable rate financing. Blue Chip concludes that it may take a higher increase in interest rates to stem the housing "juggernaut".
Industrial Production
Blue Chip Economic Indicators for July 10, 2004 reports that total industrial production surged in May by 1.1 percent following a 0.8 percent increase in April. Output in manufacturing rose by 0.9 percent and followed an increase in April of 0.7 percent. Output of semi-conductors rose 4 percent as production of computers and peripheral equipment rose 2.5 percent.
In contrast, output of motor vehicles and parts was lower for the third month in a row. Industrial capacity utilization rate rose to 77.8 percent, the highest level since May of 2001. After months of continued growth, it appears that industrial output "took a breather" in June.
Stock Market Performance
The stock market experienced a tremendous run-up in the 1990s, due in large measure to the technology boom. The subsequent bursting of the technology bubble, the downturn of 2002, international uncertainty, corporate scandals, and the attacks on the World Trade Center are among the many factors that have contributed to the dramatic downturn in the stock market in 2001 and 2002.
Chart 5
Dow Jones Industrial Average
June 30th and December 31st
Source: Dow Jones Industrial Average data from Yahoo Finance and MSN web-sites.
In 2003, there was a dramatic turnaround. The major indexes rose sharply in 2003 and ended the year close to their highs for 2003.
The Dow Jones Average grew from 8,341.63 at the end of 2002 to 10, 453.92 at the close of 2003 an increase of 25.3 percent.
The NASDAQ index grew from 1,335.51 at the end of 2002 to 2,003.37 at the end of 2003 an increase of 50.0 percent.
These increases of 25.3 percent and 50.0 percent signify phenomenal growth in stock values for a one-year period.
Since then, the Dow Jones Average closed on June 30, 2004 at 10,435.48, down 18.44 points from the December 2003 closing. In essence, the Dow has remained the same for the first six months of 2004.
Similarly, the NASDAQ index closed on June 30, 2004 at 2047.79 which is 44.42 points above the December 2003 closing. So too, like the Dow, the NASDAQ Index has been relatively unchanged for the first six months of 2004.
There are a number of factors that can be used to explain the lackluster performance of the first half of 2004. They include the threat of inflation and the continued rise in energy prices, particularly oil and natural gas, and the uncertainty of the international situation most notably expressed in the threat of terrorism.
Projections on the Economy
Factors such as the ups and downs of the Real GDP, the volatility of the international situation, the stock market and energy costs, including oil and natural gas, all contribute to the difficulty of economic forecasting.
Nevertheless, the Blue Chip Economic Indicators publication of July 10, 2004, reports the results of surveying over 50 economic forecasters including banks and other financial institutions, manufacturers, research groups, etc. This survey is forecasting a consensus Real GDP for 2004 at 4.5 percent. This is a decrease from the January through June forecasts for the year which varied at 4.6 percent and
4.7 percent.
The Blue Chip consensus forecast for 2005 is 3.8 percent up from 3.7 percent in June and consistent with January to June forecasts of either 3.7 or 3.8 percent.
The Wall Street Journal has conducted a similar survey of over 50 economic institutions and is projecting growth rates for the third and fourth quarters of 2004 of 4.4 and 4.2 percent. The forecast calls for 3.7 percent growth for the first and second quarters of 2005. ( The Wall Street Journal, July 2, 2004)
The Board of Governors of the Federal Reserve Board in their July 20, 2004 Monetary Report to Congress are forecasting a 4.5 percent to 4.75 percent increase in Real GDP for 2004 over 2003, and they are projecting a 3.5 percent to 4 percent increase in Real GDP for 2005 over 2004.
It is useful to point out that the projected growth rates for 2004, of greater than 4.0 percent, are above the rate of growth for 2003, 2002, 2001, and 2000.
Federal and State Budgets
Federal Government Budget Outlook
The Congressional Budget Office Analysis of August 5, 2004 projects a budget deficit of $422 billion for fiscal year 2004. This would be the largest deficit in U.S. history. However, at 3.6 percent of gross domestic product, it would be well below the peak levels of the 1980s.
The Congressional Budget Office in January of 2004 projected federal deficits of $250 billion for every year from now until 2010.
These federal deficits continue to impact in an adverse way the availability of funds to support education, health care, and human services. Further, these deficits will no doubt impact the Reauthorization of the Higher Education Act, IDEA, and the availability of funds for NCLB.
New York State Budget Outlook
The New York State Comptroller releases a monthly Cash Report which details receipts and expenditures by fund for each month of the fiscal year.
The Cash Report for July 2004 shows that general fund receipts for the first four months of the fiscal year were $248 million or 1.7 percent more than the first four months of last year. This is significant because receipts in the current year must make up for the loss of $2.2 billion in miscellaneous receipts used last year made up primarily of the one-time tobacco settlement money.
Similarly, disbursements were only $235.5 million more than 2003-04 levels. General fund receipts exceed general fund disbursements by $663.1 million through the first four months of the fiscal year.
The outlook for the state budget for the remainder of this year and next will be made clearer as the Governor acts on the state budget passed by the State Legislature in early August. The six-month statutorily required update to be prepared by the Division of the Budget at the end of September, along with the State Comptroller's analysis of the state budget as adopted with vetoes, will provide important information on the current and future state budgets.
Summary - Chairman Alan Greenspan
Chairman Alan Greenspan of the Federal Reserve Board presented the Federal Reserve Board's semiannual Monetary Policy Report to Congress in separate testimony before the Senate Banking, Housing and Urban Affairs Committee on July 20, and the House Committee on Financial Services on July 21.
Greenspan began his testimony with the following statement which pulls together the different pieces of the economy into a concise summary:
Economic developments in the United States have generally been quite favorable in 2004, lending increasing support to the view that the expansion is self-sustaining. Not only has economic activity quickened, but the expansion has become more broad-based and has produced notable gains in employment. The evident strengthening in demand that underlies this improved performance doubtless has been a factor contributing to the rise in inflation this year. But inflation also seems to have been boosted by transitory factors such as the surge in energy prices. Those higher prices, by eroding households' disposable income, have accounted for at least some of the observed softness in consumer spending of late, a softness which should prove short-lived.
 Sources
- Blue Chip Economic Indicators, Vol. 29, No. 7 July 10 2004
- Blue Chip Economic Indicators, Vol. 29, No. 8 August 10, 2004
- Bureau of Labor Statistics , U.S. Department of Labor
- Cash Report for July 2004, Office of the New York State Comptroller, August 16, 2004
- Monthly Budget Review, a Congressional Budget Office Analysis, August 5, 2004
- The Budget and Economic Outlook: Fiscal Years 2005 to 2014, the Congressional Budget Office, January 2004
- Dow Jones Industrials Average and NASDAQ Average, Historical Figures, Yahoo Finance and MSN Money web-sites
- Gross Domestic Product, Bureau of Economic Analysis, U.S. Department of Commerce
- NYSUT Information Bulletin, Consumer Price Index, June 2004, No. 200412, released July 16, 2004
- Labor Market Information, New York State Department of Labor
- Testimony of Chairman Alan Greenspan with Federal Reserve Board's semiannual Monetary Policy Report to the Congress, July 20 and July 21, 2004
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