The recent mix of economic news includes some signs of possible improvement. The large increase of payroll jobs in February was positive, though grossly overstated due to weather and other factors. The recent rise in a number of other economic statistics reflects some rebound from January levels depressed by bad weather, and perhaps some firming in the economy as well. In summary, over the last year GDP and employment growth has been modest. A key shortcoming in the economy in recent years has been the stagnation or decline in measures of middle class income.
The purchasing management index, an indicator of future economic activity, remains very weak at a level of 45.2 percent, just a notch above last month's low reading of 44.2 percent, and way off its high reading near 60 percent at the end of 1994. Readings below 50 percent indicate a slowing economy, while readings below 44.5 percent have implications which are even more negative.
Another barometer of future economic activity, the index of leading economic indicators (LEI) has been chronically weak. The LEI is a composite of eleven components. The ongoing weakness in the LEI is a matter of concern. In calendar 1995, LEI fell eight of twelve months. During 1995, It never climbed more than two-tenths of a percent. It ended 1995 nearly two percentage points below where it finished 1994.
On the other hand, the upward trend in the stock market may signal a recovery in the months ahead. Historically, a rising stock market is usually followed by renewed economic growth, not recession. Of course, the direction of the stock market can change at any time.
During 1995, GDP expanded at an anemic 1.4 percent growth rate (4th quarter to 4th quarter). Fourth quarter economic growth was very slow at 0.9 percent per annum. Last year's growth rate was significantly below 1994's GDP growth of 3.5 percent, and was the weakest performance since the recession ended in 1991. If the American economy is limited to 1.4 percent growth, the living standards of America's workers will continue to stagnate.
Why the slowdown in growth? It is clear that the record-breaking Clinton tax increase has been a major factor. Small business owners, targeted by the tax increase, have had their incentives and ability to grow and expand undermined. Small businesses hire most workers, provide many necessary innovations, and contribute the dynamism that makes our economy the envy of the world.
The most recent employment data are mixed, and must be viewed in context of the decline of 188,000 payroll jobs in January. The large increase of 705,000 nonfarm payroll jobs in February is overstated due to the effects of weather, returning strikers, and seasonal adjustment problems. Average adjusted job growth over the 12 months ending in February amounted to a much less impressive rate of 146,000 per month. Moreover, during the same period 265,000 jobs in manufacturing were lost.
In February, the separate household survey of the job market posted a decline in the unemployment rate from 5.8 to 5.5 percent. The percent of the population employed also increased from 62.7 to 62.9 percent. At least some of the improvement in these two labor market measures is likely due to weather-related factors.
The index of industrial production in American factories, mines, and utilities, increased 1.2 percent in February. Part of this increase is rooted in the overstated February labor data used to construct the production index.
Retail sales in February increased 0.8 percent relative to January, and were up 5.0 percent from February 1995.
The housing sector is showing signs of strength. Sales of existing single family homes rose 6.5 percent in February, the first monthly rise since October. Builders initiated construction of 3 percent more new homes in February. Building permits rose 2 percent in February relative to January, and were 9 percent above the February 1995 level. It is likely that the surge in home buying reflects heightened urgency to take advantage of low mortgage interest rates before they increase. Rising mortgage rates may dampen this sector of the economy in coming months.
Long term interest rates, as measured by the 30-year Treasury bond, peaked and started falling within days of the election of the Republican Congress in November 1994. Long-term rates then made their lows during the first week of January 1996 when it became apparent that President Clinton would be successful in obstructing Republicans' efforts to balance the budget. The benchmark 30-year Treasury bond has risen from its low of 5.96 percent to its current level of 6.6 percent. The long term bond rate drives the home mortgage rate, and it is crucial to many sectors of the economy.
The Federal Reserve recently decided, due to fears of inflation, not to reduce short-term interest rates. Any strengthening of the economy will not come from changes in Federal Reserve policy.
Last December the Joint Economic Committee (JEC) released a major study, The Impact of the Welfare State on the American Economy, documenting the negative effects of the excessive (outlays above about 17.5 percent of GDP) federal government on economic growth. Every dollar of excessive federal spending reduces economic growth by 38 cents. In other words, the last $100 billion rise of federal spending has reduced the amount of economic growth by $38 billion. The JEC has just released the second in this series of studies which describes how excessive federal spending, above about 17.5 percent of GDP, retards the growth of wages and benefits. According to this JEC study, each dollar of excessive federal spending reduces the sum total of wages and benefits in the economy by 26 cents. With the recent focus on stagnating wages, this study should be of interest to all parties, including the Administration.
Relative to 1992 levels, real median household and family income measures have stagnated under the Clinton Administration. Both measures actually declined in 1993. A JEC finding that there was no statistically meaningful growth in both measures since 1992 prompted the JEC to ask for a statistical analysis by the Census Bureau. The Census Bureau confirmed the JEC finding that there was no increase in real median family income between 1992 and 1994. In other words, under the Clinton Administration the growth rate of real median family income has been ZERO percent, compared to a 1.7 percent annual growth rate in real median family income during the Reagan expansion years.
It is interesting to note that under the standard liberal criteria of equality, the shares of total family income generated by the top 5 percent and top fifth is higher under Clinton than in the Reagan years, or in any year in the postwar period. The share of income of the bottom fifth is now lower under Clinton than in any Reagan year, or any year in the postwar period.
Given the murkiness of current economic statistics, it is even more difficult than usual to know where the economy is headed. For every positive statistic, there is an corresponding negative statistic. What seems apparent is that the economy is not in a recession. However, there is no evidence of a surge of growth either.
The economy has been performing under its potential since 1990. It has been hampered by high taxes, excessive government spending and burdensome regulations. The short-term, cyclical pattern of the economy is murky but the long-term trend is clear. The economy is under-performing its potential. Only by releasing the productive abilities of the American people expressed through the market economy can the economy provide a prosperous future for our children.
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