Economy exhibits solid growth - but soft spots remain

Job growth still lags, but expanded US business activity and turnarounds in Asia are providing boosts.

As it nears the end of the year, the economy is rocking and rolling.

Home sales are booming, manufacturing is picking up, and, except for last weekend in the snow-covered Northeast, downtown department stores are alive with shoppers. Business is even getting into the swing, spending money on new forklifts and computers.

"The economy is off and running," says Mark Zandi of, an economic website.

Yes, it is running, but it's no longer sprinting. Economists believe the economy has slowed from its searing 8.2 percent pace in the third quarter to 4 or 5 percent. Even at this pace, it would indicate the economy will be entering the new year with a lot of momentum. "We're at the beginning of a solid self-sustaining economic expansion," says Mr. Zandi.

One of the new elements in the economic picture is a big improvement in the international economy. European economies are starting to show some signs of life. And Asia is growing. Economists believe Japan is growing at about 3 percent annually, an improvement over the snail pace of the past few years. Even more important, China's economy is booming. The Chinese are buying everything from scrap metal to bulldozers.

"They are buying everything from their neighbors that is not nailed down," says Bob Gay, chief economist at Commerzbank Securities in New York. "This means the US is not propping up the world anymore."

Despite this optimistic assessment, it's still an economic recovery that has a soft spot - job creation. This was apparent again last Friday, when the Labor Department reported 57,000 new jobs were created in November - far fewer than expected. At the same time, Washington could point to something positive in the report: The unemployment rate fell from 6 to 5.9 percent.

This modest job creation is one of the reasons economists expect the Federal Reserve will keep interest rates unchanged when the central bankers meet Tuesday. "We need a couple of months of employment growing at 150,000 a month before the Fed feels comfortable raising interest rates," says Zandi.

The Fed will have to keep on eye on the dollar, which is down about 15 percent so far this year. Last week, OPEC, which prices its oil in dollars, said it might consider cutting production in the future to make up for the lower-valued US currency. Already, the price of gold and some commodities are higher, reflecting higher world demand.

But so far, the Fed has yet to indicate it is concerned about higher prices. "Chairman Greenspan wants to see an accelerating trend in inflation before he would even think about raising interest rates," says Sung Won Sohn, chief economist for Wells Fargo Banks in Minneapolis. "In the final analysis, the core inflation [the CPI, less food and energy] is lower than a year ago, and our expectations are that it could be lower again in 2004."

Mr. Sohn says one example is the falling price of electronics. Last year, he looked at buying a Sony digital camera that cost $580. He purchased the same camera this year for $380. "There is still a lot of competition for the consumer," he says.

The Fed can also justify not acting by pointing to the phenomenal increase in productivity. Last week, the government reported US productivity in the third quarter rose at an annualized 9.4 percent rate, the best it has been in 20 years.

Productivity, the ability to produce more per worker, has been enhanced by the reluctance of companies to hire new employees. However, some economists think business can't put off hiring new workers much longer. "There is a pent-up hiring need," says Mr. Gay.

Some economists expect next month's unemployment numbers will show much better job growth. So far, retailers have been slow to hire seasonal workers, but if holiday sales come in as expected, retailers will start to hire shortly, says Zandi.

Some economists believe the labor picture will improve next year as business becomes more confident of the sustainability of the economic recovery. Hugh Johnson, chief investment strategist at First Albany Securities in Albany, N.Y., estimates job growth will average 160,000 new jobs a month in 2004. "It will start lower and end better, maybe as much as 200,000 new jobs by year-end," he predicts.

In fact, some observers think the labor market could tighten up next year. Some surveys already indicate that 30 to 40 percent of the workforce is focused more on finding another job than on doing better in their current position. "Employment and employee turnover are picking up," says Joyce Gioia, president of the Herman Group, a firm of consulting futurists.

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