- The Washington Times - Saturday, January 3, 2004

As the race for the Democratic presidential nomination accelerates, more and more evidence points to the continuation of the economy’s very robust expansion throughout the election year. What a difference a year makes.

One year ago, as the Democratic field began to emerge, the economy was at the midpoint of a six-month period during which the annual growth rate fell below 1.5 percent. Last January, nonfarm payrolls were poised to shed another 500,000 jobs before bottoming out; and the unemployment rate was about to increase nearly three-quarters of a percentage point over the next five months, reaching a cyclical high of 6.4 percent in June.

During last year’s third quarter, however, the economy expanded at an annual rate of 8.2 percent, its fastest pace since 1983. And the unemployment rate has now fallen below 6 percent.

To be sure, it is unlikely that the U.S. economy maintained the third quarter’s torrid pace during the final three months of 2003. Nevertheless, Friday’s report on December manufacturing activity by the Institute for Supply Management (ISM) revealed that the manufacturing sector ended the year on an extremely positive note. Noting that its major economic indicator — the purchasing-managers’ index (PMI) — expanded at an accelerating rate last month, ISM reported that “the manufacturing sector enjoyed its best month since December 1983.” It was the sixth consecutive month of expansion in the manufacturing sector.

PMI readings above 50 indicate an expanding sector. A survey of economists projected a consensus estimate of 61, which would have reflected a modest deceleration from November’s pace. However, the actual December PMI level came in at a roaring 66.2.

Much of the manufacturing momentum came from new orders, the index for which hit its highest level last month since July 1950. Due in part to the unanticipated strength of demand, inventories contracted last month and firms reported that the inventories of their customers were deemed to be too low. ISM also reported that order backlogs increased last month. New export orders increased as well. Meanwhile, suggesting a long-awaited improvement on the manufacturing employment front, ISM’s employment index improved for the second month in a row. Altogether, 17 of the 20 industries in the manufacturing sector reported growth.

“The strength in December’s data,” ISM said in a statement, “provides significant encouragement for prospects in the first quarter of 2004.” The economic prospects for this year extend beyond the manufacturing sector, according to the details of an exhaustive survey that ISM released three weeks ago. ISM’s forecast for the entire economy predicted that growth would “continue at a relatively strong level in 2004.” Capital expenditures in both the manufacturing and non-manufacturing sectors are expected to rise, particularly in the latter sector.

For this year, ISM forecast employment growth of 0.3 percent in manufacturing and 1.4 percent in the much larger non-manufacturing sector. While projected employment growth in both sectors is positive, back-of-the-envelope calculations suggest the overall growth rate in employment may not be sufficient to put a major dent in the current unemployment rate. Huge gains in productivity largely explain the coexistence of rapid economic expansion and modest employment gains.

ISM’s survey also found expectations of a moderate increase in inflation. The prices of manufactured goods are expected to rise by 1.3 percent, while non-manufacturing prices are projected to increase 2.1 percent. Such a modest acceleration in inflation may actually represent a positive development. It would reduce the disinflationary pressures that so alarmed the Federal Reserve for much of last year. In fact, on Dec. 9 — the same day ISM released its authoritative forecast for 2004, including its projection of moderately rising inflation — the Fed’s policy-making committee issued a statement following its regularly scheduled meeting declaring that “[t]he probability of an unwelcome fall in inflation has diminished in recent months.”

All things considered, 2004 looks to be a solid year on the economic front. What a difference a year makes.

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