Two recent economic reports on jobs and gross domestic product (GDP) indicate that the economy is showing some signs of weakness. The economy will begin to be under increasing pressure from higher oil prices, rising interest rates, and a ballooning deficit. Over the period from 2004 to 2009, the White House projects that $1,727 billion will be added to the federal debt -- and this projection does not include many policy proposals favored by the President and many in Congress which would increase the deficit even more.

Employment

The job market showed an extremely weak and disappointing gain of just 32,000 jobs in July -- well below expectations as well as below the level needed to keep up with the growth of the labor force. The measured unemployment rate however, did decline very slightly by one tenth of a percentage point to 5.5 percent.

The weak labor market is also having a toll on salaries. According to the Economic Policy Institute, "For those lucky enough to land a new full-time job, the median pay rate fell from $681 per week in their old job to $572 per week in their new job."

Source: St. Louis Federal Reserve, National Economic Trends, 8/6/04

Gross Domestic Product

In addition the nation's economy as measured by the gross domestic product (GDP) grew at a disappointing 3.0 percent annual rate in the second quarter of 2004, the Bureau of Economic Analysis announced. This growth rate is the lowest since the first quarter of last year (see graph below).

Source: St. Louis Federal Reserve, National Economic Trends, 8/6/04

Particular weakness was seen in consumer spending, which had been the strongest part of the economy through the 2001 recession and afterwards and which grew at its slowest pace since early 2001 -- at an annual rate of just 1 percent.

This recent data demonstrates that the economic policies currently in place are not getting the job done, and that neglect of the domestic macroeconomic situation can have real consequences for the job market and the overall economic situation.

As a recent report from Economy.com, an economic consulting and forecasting firm, stated about the Bush economic policy record, [t]he economic bang for the buck from these policies. . . has been substantially lacking. The report in part concluded, [i]t is not difficult to construct a package of alternative fiscal policies that would have lifted the moribund economy much more quickly and powerfully.

Mounting Pressures

Growing Federal Budget Deficit

According to OMB, the fiscal year 2004 deficit is set to reach $445 billion, and $1,727 billion will be added to the federal debt over the period 2004-2009. If a permanent fix of the Alternative Minimum Tax and additional tax changes such as the elimination of the estate tax for multi-millionaires are enacted, the deficit projections would be even worse.

Oil prices

Oil prices have continued to rise, rising well above the $40 level. This "oil tax" presents a real drain on the domestic economy, and has likely contributed to the recent weakness, especially in consumer spending.

Source: St. Louis Federal Reserve, National Economic Trends, 8/6/04

Interest rates

While interest rates have risen slightly in recent months, the housing market remains strong. However, this boom is likely to be temporary since the threat of even higher interest rates in the future probably led many people to jump into the market or to speed up their home-buying plans. Further increases in interest rates pose a significant threat to the economy over the next year.

The Federal Reserve was expected to raise rates again at their August 10th meeting of the Federal Open Market Committee, but recent data suggests they may postpone any increase.