- The Washington Times - Friday, April 8, 2005

It remains true that inflation-adjusted (real) oil prices are still well below their peaks of the early 1980s, when the price of crude oil hovered near $90 a barrel measured in today’s dollars. Nevertheless, the surging price of crude has clearly made itself felt on the world’s three major economies — the United States, the eurozone and Japan. The world economy could be facing the consequences of yet another oil shock.

Nobody should read too much into the disappointing job-creation numbers for just one month: March, when nonfarm payrolls expanded by only 110,000 jobs, about half the increase expected. On the other hand, March was the fourth month out of the last five when payrolls grew by less than 160,000. In fact, the unsatisfactory level of employment growth in March was much closer to the disappointing performances of November (132,000), December (155,000) and January (124,000) than it was to the robust results in February (243,000). Also, manufacturing payrolls are still more than 2.7 million jobs below their level the month before the last recession started in early 2001. Moreover, the decline of the U.S. unemployment rate to 5.2 percent is tempered by the fact that the labor force participation rate for the first quarter remained at its lowest level since 1988.

Notwithstanding America’s below-average job growth relative to previous business expansions, the U.S. economy, thanks largely to huge leaps in productivity, has been growing by more than 4 percent a year since the end of 2002. Over the past decade, U.S. economic growth has averaged 3.3 percent a year. That includes the recession of 2001 and the job-loss recovery of 2002 and early 2003. By contrast, as Robert Samuelson recently observed, “even with the stimulus of selling to the United States, economic growth in Europe and Japan has averaged only 2 percent and 1.5 percent annually since 1994.”

U.S. economic growth is expected to moderate slightly in 2005, but in Europe and Japan, the economic forecast is quite bleak. The European Union on Monday lowered its projection for eurozone growth in 2005 to a paltry 1.6 percent. Germany, the erstwhile European locomotive, will expand by less than 1 percent this year after growing by a minuscule 1.5 percent during 2004. Meanwhile, the February unemployment rate among the 12 eurozone nations increased to 8.9 percent, while surveys of European manufacturing firms in March revealed a sharp slowdown in output and a collapse of new orders.

In Japan, the economy declined during the second and third quarters last year and barely grew during the fourth. Japanese industrial production fell 2.1 percent in February, and the unemployment rate increased for the first time since July. Consumer prices in deflation-afflicted Japan were 0.4 percent lower in February compared to a year earlier, the steepest year-over-year drop since June 2003. Japan’s economy, like Germany’s, is projected to grow by an anemic 0.8 percent this year.

If the oil-shock hammer hits the world economy again, the recovery will almost certainly be less robust because there is no reason to believe that Europe and Japan will begin to carry their own weight.

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