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The Pulse of Capitalism

Issue Number 04-3, October 2004

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International Comparisons
Business Activity Indicators
Financial Indicators - United States
Selected International Transactions - United States

Employment and Consumption

The payroll information reports demonstrate that the latest economic downturn is quite unlike the two that preceded it. In 1981 payroll employment peaked at 91.2 million before turning down in 1982-83. By 1984 it had risen to 94.5 million, 3.3 million above the previous peak. In 1990 employment peaked at 109.4 million before falling in 1991-92. By 1993 it had risen to 110.7 million, 1.3 million above the previous peak. But in 2001, employment peaked at 131.8 million before falling in 2002-June 2004. In June it still remained .6 million below the previous peak. To examine this latest episode, we need a breakdown of the labor force and what changes took place during the boom of the 1990s and the subsequent bust. Total employment rose 21 million from 1993 to 2001 but fell .6 million from 2001 through June 2004. The impact of this change on the various segments of the labor force is shown in the following table:

Nonfarm Payroll Employment
Average Yearly change (thousands)
1993-2001 2001-June 2004
Total Employment 2,623 -427
Goods Producing 207 -833
Manufacturing -42 -836
Services producing 2,416 406
Trade, transportation & utilities 451 -226
Retail trade 277 -91
Financial activities 137 81
Professional & business services 623 -66
Education & health 418 475
Leisure & hospitality 288 98
Other services 234 -128
Government 266 171
Source: Economic Indicators

For context in analyzing these employment data, it should be noted that real GDP faltered but did not fall in 2001 and rose moderately in 2002 and 2003. Industrial production peaked in 2000 but matched the 1999 level in 2001-02-03; the 2000 level was again reached by April 2004.

Employment gains in the nineties averaged 2.6 million per year but from 2001 through June 2004 declined .4 million per year. Manufacturing was the largest single sector contributing to this reversal, but it was the weakest sector in the nineties as well, losing 42 thousand jobs per year all through that period, even though industrial production rose strongly.

Employment gains in services producing industries have slowed considerably, from 2.4 million per year to .4 million per year. Of the seven major groupings shown in the table, three show outright declines since 2001. Professional and business services was the fastest growing sector in the nineties but has shown small losses since 2001. Trade, transportation and utilities added .5 million per year in the nineties but has lost .2 million per year since 2001. Other services also show reversals from gains of .2 million to losses of .1 million.

Three of the four groupings that continued to add employment did so at lower rates of gain: Financial activities, Leisure and hospitality, and Government. The only sector continuing to gain jobs at a higher pace was Education and health, from .4 million per year to .5 million per year. These two areas are somewhat immune to the market forces that affect most of the economy.

Since real GDP never declined during the entire period we are considering, we cannot explain these job changes simply on the basis of a decline in general business activity. Two other developments do help to explain them. The first is business consolidation. For example, retail jobs creation turned from positive to negative, yet retail sales grew every year from 1993 to June 2004. But we know from our own observation that there has been a great deal of consolidation in retail sales operations. Consolidation eliminates duplicate activities such as management, accounting, payroll and personnel, purchasing, etc.

The second development affecting the jobs market is higher productivity. This is seen clearly in manufacturing. By April, 2004, the index of industrial production had surpassed its previous peak of 115.4 in 2000, but employment in manufacturing was 2.9 million below its level in 2000 and was not rising. The nineties were noted as a decade when the computer flourished in the business world as well as in the personal world. In the business world, greater computer use normally meant elimination of jobs to obtain greater productivity. This process is probably the largest factor in the slowdown of employment growth. In a sense we are the victims of our own efficiency: we failed to plan for the consequences of what we were doing.


The employment growth of the nineties was extraordinary by any measure, and at this time it seems unlikely that future growth will match it. What will be the consequences if this happens?

As we are frequently reminded, ours is a consumption-driven economy. Personal consumption expenditures equal about two-thirds of real GDP. Official responses to the economic downturn have been aimed at supporting this sector. Jobs growth has been a powerful stimulant to consumption by raising income over the past decade as shown in the following table. Two measures are shown, personal income and disposable personal income, which is income after personal taxes.

Personal income and disposable personal income
Percent change per year
Personal income Disposable personal income
1993 3.1 3.3
1994 5.1 4.9
1995 5.3 5.0
1996 6.0 5.2
1997 6.1 5.3
1998 7.3 6.8
1999 5.1 4.7
2000 8.0 7.5
2001 3.4 3.8
2002 2.3 5.2
2003 3.3 4.6
FH 2004 3.6 4.6
Source: Economic Indicators

The impact of tax changes is clear in this table. Before 2001 gains in personal income exceeded those in disposable personal income, but since then they have lagged. Personal income gains peaked in 2000 at 8 percent but have since fallen to less than half that rate. Disposable personal income gains also peaked in 2000 but have declined less.

Household debt

Consumption is promoted not only by rising income but also by rising household debt. In recent decades, debt has risen faster than income, often at double digit rates as in the 1980s. During the period we are considering, household debt rose on average 7.5 percent per year from 1993-2001, but increased to 9.7 percent in 2002, 10.6 percent in 2003, and 5.3 percent in first half 2004. This debt represents both consumer credit and home mortgages, but even mortgages (home equity and cash-outs) directly stimulate consumption. Moreover, the divergence between personal income and disposable personal income has an element of debt in it. The divergence is due to tax cuts effective in 2002 and 2003. Since the federalgovernment is in deficit, part of disposable personal income represents debt rather than real income.

The important point is that all debt must be serviced from current income. Low interest rates facilitate this process, but any major rise in interest rates will greatly complicate it. The data in this respect are not reassuring. Household debt as a percent of personal income was 76.l percent in 1993 but 100.8 percent in 2003.

There is a vicious circle involved here. Increasing employment depends on rising consumption. Rising consumption depends on increase in income and debt. But increases in debt(or interest rates) reduce the amount of income available for consumption, which, in turn, limits the growth of employment. The result is something very close to our current economy.

International Comparisons
Canada Germany Japan United Kingdom United States
GDP (% chg. from same quarter a year earlier)
    2002 (Q4)
3.9 0.5 2.8 2.2 2.9
    2003 (Q4)
1.6 0.2 3.4 2.8 4.3
    2004 (Q2)
3.0 2.0 4.4 3.7 4.7
Industrial Production (1997=100)
117.3 109.9 91.7 100.0 110.9
117.5 110.3 94.5 99.9 111.1
    FH 2004
120.2 112.8 99.3 100.0 115.1
Retail Sales (volume chg. on year ago)
    2002 (Dec)
1.4 -3.2 -3.0 6.4 4.9
    2003 (Dec)
0.8 -2.5 0.4 4.0 7.4
    2004 (June)
3.1 -2.2 -2.9 7.2 5.6
Consumer prices (1982-84=100)
172.9 146.7 119.0 207.0 179.9
177.7 148.3 118.7 213.0 184.0
    FH 2004
180.1 150.2 118.4 217.5 187.6
Unemployment Rates
    2002 (Dec)
7.5 10.1 5.3 5.1 6.0
    2003 (Dec)
7.4 10.4 4.9 4.9 5.7
    2004 (June)
7.3 10.5 4.6 4.7 5.6
Interest Rates (3 months)
    2002 (Dec)
2.67 2.94 * --- 3.84 1.19
    2003 (Dec)
2.6 2.1 * * --- 3.9 0.9
    2004 (June)
2.0 2.1 * --- 4.5 1.3
Stock Indices (ending)
6,614.54 2,892.63 8,578.95 3,940.40 8,341.63
8,220.89 3,965.16 10,676.64 4,476.90 10,453.92
    FQ 2004
8,545.58 4,052.70 11,858.87 4,464.10 10,435.48
Current Acc't Bal's ($bn) latest 12 months
11.0 50.4 115.0 -13.1 -480.9
18.5 56.3 136.0 -30.8 -541.8
    FH 2004
23.8 93.7 163.6 -41.7 -571.9
Foreign Exchange Rates
1.57 0.95 * 125.22 1.50 126.75
1.40 1.13* * 115.94 1.63 119.28
    FQ 2004
1.34 1.23 * 108.47 1.82 114.67
Currency units per U.S. $
UK pound in U.S. $s
U.S. dollar: index of dollar against major trading partners, January 1997=100
* Euro area (US$/Euro)
Sources: Economist, Economic Indicators,
F.R. Bulletin, Survey of Current Business

All five economies accelerated GDP growth in the second quarter of 2004 in comparison with the same quarter of 2003, with the largest gain in Germany. Industrial production also accelerated in all five economies, but Japan and Britain still had not surpassed the 1997 base level.

Retail sales growth remained negative in Germany and Japan while growing in the other three countries. It is striking that sales growth is weak in the two largest current account surplus countries but strong in the two largest deficit countries.

Consumer price inflation increased in 2003, and the increase continued through FH 2004 except in Japan where the index remains lower than in 1998. Unemployment edged down except in Germany where it rose .1 percent despite an increase in industrial production. Short term interest rates were mixed and changes were small, rising in the U.S. and Britain but falling in Canada and unchanged in Germany.

There was divergence in the stock indices. Those in Germany, Britain, and the U.S. changed little while those in Canada and Japan moved higher. The U.S. Dow index ended the third quarter lower than the second quarter, not a good sign of future economic activity.

The current account surpluses of Canada, Germany, and Japan continued to increase in the first half while the deficits of Britain and the U.S. continued to increase also. One can only wonder how long this dynamic can go on. The exchange value of the U.S. dollar is a key element in this dynamic. From 2002, the U.S. dollar index fell from 126.75 to 112.54 in January, 2004 before rising to 115.91 in June. The Japanese and other Asian central banks have been strong buyers of U.S. dollars which they then invest in U.S. Treasury securities. These purchases obviously strengthen the dollar, and U.S. authorities obviously welcome the activity. If they did not, they could buy yen and other currencies, thus canceling the effect of Asian actions. Again, one has to wonder how these games can go on.

Business Activity Indicators - United States
2002 2003 FH 2004
Industrial Production (1992=100) 110.9 111.1 115.1 *
    Capacity Utilization Rate (% total industry)
75.6 74.8 76.8
Manufacturers' New Orders (billions of $s) 316.7 329.2 355.9 #
New Construction Expenditures (billions of $s) 871.3 915.7 974.1 *
Real Gross Priv. Dom. Invest. (chained[1996]$s) 1,560.7 1,628.8 1,800.4 *
Business Sales - Mfg. & Trade (billions of $s) 822.0 857.0 922.9 #
Business Inventories (ending) (billions of $s) 1,163.7 1,185.5 1,210.6
Retail Sales (billions of $s) 269.2 283.3 299.0 #
Retail Inventories (ending) (billions of $s) 430.5 451.5 461.7
Per Cap. Personal Consump. Expend.'s (chained 2000 $s) 24,713 25,269 25,779
Nonagricultural Employment (millions) 130.3 129.9 # 130.7 #
    Goods Prod. (millions)
22.6 21.8 21.8 #
    Services Prod. (millions)
107.8 108.1 109.0 #
* Annual Rate
# Monthly average
Source: Economic Indicators

Real GDP rose 2.8 percent in the second quarter of 2004 after rising 4.5 percent in the first quarter and 3.0 percent for 2003. Personal consumption expenditures and private domestic investment were the primary contributors to the increases.

Industrial production began to rise in November, 2004, and the rise continued through the first half, mainly in manufacturing; mining and utilities were virtually unchanged. The capacity utilization rate gained two points, while manufacturers' new orders have risen strongly since January.

New construction expenditures rose to new highs every month through July; most of the gain was in residential housing, but there were increases in nonresidential construction as well. The vacancy rate for rental housing at 10.4 percent in March was the highest in over a decade.

Gross private domestic investment surpassed its previous peak set in 2000 in the first half of 2004. About half of the gain over 2003 was in non-residential equipment and software, with the other half divided between residential investment and change in private inventories.

Business sales surpassed their 2000 peak in 2003 and continued to rise in the first half of 2004. Retail sales did not decline during the economic downturn, but their rise since March 2004 has been weak. Inventory-sales ratios are low, particularly in manufacturing and trade. Real per capita consumption expenditures continue to rise about $500 per year.

Although many economic indicators have reached and surpassed their pre-downturn peaks, payroll employment through August had yet to do so. Total employment peaked in 2001 at 131,826 thousand and in August was 131,475 thousand. Goods-producing employment was 23,873 thousand in 2001 and in August was 21,942 thousand. Services-producing employment was 107,952 thousand in 2001 and 109,533 thousand in August. Education and health services employment was 15,645 thousand in 2001 and 16,958 thousand in August, accounting for most of the gain in services employment.

Financial Indicators - United States
2002 2003 FH 2004
National Income (billions of $s) 9,225.5 9,679.7 * 10,185.5 *
    Percent change
2.7 4.9 5.2
Per Cap. Disp. Personal Income (chained [2000]$s) 26,227 26,569 27,018 *
Avg. Real Gross Wkly Earnings (1982=100) 278.83 278.75 278.15
Gross Saving " 1,484.4 1,487.9 1,582.2 *
Consumption of Fixed Capital " 1,304.0 1,354.0 1,364.6 *
    Net Saving "
180.4 133.9 217.7 *
      Private "
459.8 501.6 590.6 *
    Government (all) "
-279.5 -367.7 -372.9 *
Commodity Price Index (1995=100) 74.7 89.0 94.7
Producer Price Index (1982=100) 138.9 143.3 147.2
Corp. Profits (with i.v.a.&c.c.a.) (billions of $s) 874.6 1,021.1 1,166.4 *
Interest Rates - 10 year Treas. 4.61 4.01 4.31
Money Supply - M3 (ending) " 8,552.5 8,845.7 9,294.9
    Percent change
6.6 3.4 5.1
Commercial Bank Credit (ending) " 5,886.8 6,252.6 6,560.2
Consumer Credit (ending) " 1,905.0 1,986.7 2,038.4
Credit Market Debt (ending) " 31,320.7 34,007.4 35,181.7
    Nonfinancial Sector "
21,218.4 22,922.0 23,755.5
    Financial Sector "
10,102.3 11,085.3 11,426.2
    Household Sector "
8,372.4 9,252.3 9,670.4
Total bankruptcy filings (thousands) 1,576.1 1,659.6 828.7
* Annual rate Sources: Economist, Economic Indicators, F.R. Bulletin, F.R. Flow of Funds, Administrative Office of the U.S. Courts

From 1994-2000, national income grew 7.3 percent per year; from 2000-2003, it grew 3.4 percent per year, and from 2003-FH 2004(a.r.) it grew 5.2 percent. Corporate profits during the 2003-FH 2004 period grew 14.2 percent, while compensation of employees grew 3.8 percent. National income data is not adjusted for inflation.

Real per capita personal income increased more in FH 2004 (a.r.) than in 2003 but less than in 2002. Real average weekly earning fell in 2003 and declined further in FH 2004.

Gross and net saving increased in the first half due to an increase in private saving in the form of undistributed corporate profits. Net government saving was $-372.9 billion (a.r.) compared with $-367.7 billion in 2003.

Commodity prices continued to rise toward the index base figure of 100 due to surging demand from China and other Asian economies and to rising oil prices. Producer prices fell moderately in 2002 but have risen since then.

Corporate profits (with i.v.a. & c.c.a.) could be called the "star" of the current economic upturn, rising $146.5 billion in 2003 and $145.3 billion (a.r.) in FH 2004. The capital consumption adjustment, which lowers taxes, rose to $237.1 billion in FH 2004 (a.r.) from $160.8 billion in 2003.

The interest rate on 10 year Treasuries rose to 4.73 percent in June but then fell back close to 4.0 percent by the end of September. The interesting thing about this move is that it comes when the Federal Reserve is raising short-term rates. The market seems to be signaling a different message than the Fed. The M-3 money supply continued to grow in the first half; two main sectors were savings deposits and large denomination time deposits. The federal government deficit was slightly larger in the first half (a.r.) than in 2003.

Most of the increase in bank credit was again in real estate loans and leases; commercial and industrial loans and leases again fell. Consumer credit grew faster in the first half than in the preceding twoyears but well below the 1998-2001 level.

Non-financial credit market debt grew 8.4 percent in FH 2004 (a.r.), higher than the average over the past decade. Federal debt grew 11.4 percent while household debt grew 10.4 percent. Financial debt grew 6.9 percent.

Selected International Transactions - United States
2002 2003 FH 2004
Trade Balance on Goods & Services ($bns) -421.7 -496.5 -288.9
    Goods "
-482.9 -547.6 -314.30
    Services "
61.2 51.0 25.5
Net U.S. Int'l Invest. Pos'n * -2,233.0 -2,430.7 n.a.
    U.S. owned assets abroad * "
6,413.5 7,202.7 n.a.
    Foreign owned assets in U.S. * "
8,646.6 9,633.4 n.a.
Selected foreign owned assets in U.S
    Direct investment * "
1,505.2 1,554.0 n.a.
    U.S. Treasury securities "
1,254.1 1,499.2 n.a.
    U.S. currency "
301.3 317.9 n.a.
    Other U.S. securities "
3,041.1 3,701.4 n.a.
* With direct investment valued at current cost.
Sources: Economic Indicators, Survey of Current Business

The deficit on goods and services increased to an annual rate of $577.8 billion in the first half of 2004. Exports and imports of goods both increased, but the rise in imports was larger. Exports and imports of services rose about the same amount, with a small decline in the surplus. The increases in goods exports and imports were broad-based across industrial supplies and materials, capital goods, and consumer goods, reflecting a pickup in world trade. The services sector increased for the same reason.

At current cost (the basis used throughout this discussion) U.S. owned assets abroad increased $789.2 billion in 2003 of which $283.4 billion was financial outflows and $505.8 billion was valuation adjustments. Foreign-owned assets in the U.S. increased $986.8 billion of which $829.2 billion was financial inflows and $157.7 billion was valuation adjustments. The U.S. net investment position increased -$197.7 billion in 2003 compared with -$344.3 billion in 2002. The value of U.S. owned assets abroad was boosted by appreciation of most foreign currencies against the U.S. dollar.

Foreign direct investment in the U.S. increased $48.8 billion in 2003, mostly due to financial inflows of $39.9 billion, the smallest since 1992. U.S. owned direct investment abroad continued to exceed foreign investment in the U.S. by a substantial amount.

Foreign owned U.S. Treasury securities increased $245.1 billion in 2003 to a total of $1.5 trillion. This increase equaled 67.2 percent of the $364.5 billion federal deficit in 2003. How convenient to have your profligacy financed by foreigners!

U.S. currency held abroad increased $16.6 billion in 2003 after increasing $21.5 billion in 2002.

Foreign holdings of U.S. securities excluding Treasury securities increased $660.2 billion or 21.7 percent in 2003. The major part of this increase was due to price and exchange rate appreciation rather than additional investment. Net foreign purchases of corporate bonds were a record $227.1 billion. In contrast, transactions in U.S. agency bonds (Fannie Mae, etc.) shifted to net sales of $13.4 billion. By region, the United Kingdom remained the largest holder of corporate and agency bonds at 40 percent, while the largest holders of U.S. stocks were the United Kingdom, Canada, and Japan. Net foreign purchases of U.S. stocks declined for the third consecutive year.

Copyright © Andrew Caughey, 2004

The Pulse of Capitalism is published quarterly. Comments may be sent to Pulse Publication, P.O. Box 140, Gibsonia, PA 15044. Telephone: (724) 443-2396
Material may be reprinted with acknowledgement of the source. Economic statistics are revised routinely and may, therefore, differ from one report to another.

Published OCtober 2004

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