The U.S. economy.

• Author: Witte, Willard E.
• Position: The Big Picture

The U.S. economy during 2004 brings to mind Charlie Brown, Lucy, and the football. From experience, Charlie knows he should temper his enthusiasm. But the possibility of putting the ball through the uprights seems to be there, and he thinks maybe now is the time. And then Lucy snatches the ball away and Charlie is flat on his back (again).

For the economy, the past several years certainly counsel caution. But as things unfolded in the latter stages of 2003 and the first part of 2004, the possibility of the economy soaring upward on a perfect trajectory into a clear blue sky was hard to resist. More recently, sadly, reality has intervened. To be sure, the Charlie Brown metaphor is not perfect. The economy is not flat on its back by any means. But the dream of perfect trajectory is probably not in the cards, at least not in 2005.

Earlier this year, a broad range of economic indicators were sending out positive signals. By March, output had registered four straight quarters of growth above 4 percent, with the full period over 5 percent. Figure 1 shows the growth rate for real output both quarter by quarter and relative to the same quarter a year earlier. At the sectoral level, the growth of business spending on equipment accelerated over the same period from about zero to well into double-digits, while growth in consumption spending went from below 3 percent to above 4 percent. In the labor market (which tends to lag slightly), employment began to expand in September and increased by an average of 225,000 per month during the first five months of this year. Figure 2 shows employment growth and the unemployment rate. Rising employment is a manifest indication of business optimism. It implies rising income and does wonders for consumer confidence. It seemed that finally the economic football was ready to really take off.

[FIGURES 1-2 OMITTED]

But as the weather turned warmer, signs that the ball might be snatched away started to appear. The initial problem was the labor market. In June, payroll employment rose only 96,000, and then this disappointing performance was repeated the next month with an increase of only 85,000. The evidence of deceleration was reinforced when second quarter output growth came in at 3.3 percent, more than a full percentage point below the first quarter. Even more troubling, consumption advanced at only a 1.6 percent rate.

Other events over the summer raised more concerns. The Federal Reserve staffed to push short-term...