Brooklyn's Progress
November 2004

By Joel L. Naroff, Ph.D.

Another month, another round of not so great economic numbers. Although the economy is still moving forward, it is doing so at a more moderate pace and, with oil breaking the $50 per barrel barrier, the job market has been put on hold. So what else is new?

The story this month is oil. It is bad enough that the price has skyrocketed to historic highs. Worse, households and firms are acting as if they will have to deal with these high costs well into the future. 

It is the long-term planning for high energy costs that is the newest hurdle for the economy. It has driven consumers into a funk. Lower income households, who really cannot afford the higher gasoline prices, are cutting back on their spending. As a result retail sales, especially at discount stores, were not very good in August.  

And then there are firms. They see demand falling, so they have become more conservative. The consequence is that they have slowed their hiring significantly. During the past four months, the economy has added only 100,000 jobs per month, less than half what it should be creating. There also is the worry that as companies plan for higher energy costs in 2005, they will not only keep payrolls down, but they might look for ways to raise prices. If they do that, inflation could rise.

Yet in spite of it all, the economy keeps on keeping on. Amazingly, growth in the quarter that just ended could top a very solid 4%. Okay, the increases are not as great as they had been, but the sector is still in good shape. Leading the way is manufacturing, where output continues to expand. With the return of incentives, motor vehicle sales jumped in September. And, of course, there is the housing market, which is as hot as ever in many places. We can thank low mortgage rates for that.

So although the focus rightly is on energy and the disappointing job market, the fundamentals of the economy remain decent. We are in no danger of falling into a recession.

Which brings us to the Federal Reserve, which raised interest rates once again on September 21st. This was the third increase since June. A variety of consumer rates, including home equity lines and some credit card, followed the Fed up. 

With all the economic uncertainty, why is the Fed pushing up rates? Simple. Rates were at historic lows because of the many hurdles the economy faced over the past four years.  With business activity expanding decently, there was no reason to keep rates so low.  Indeed, as long as the growth remains moderate or better, look for the Fed to continue to hike rates.

So, what should we expect between now and the election? A lot of political noise and more economic numbers that point to an economy moving along at a pace that is neither “too hot” nor “too cold”.  But for those looking for jobs, it is also not “just right.”

Joel L. Naroff, Ph.D, is Chief Economist for Commerce Bank. Commerce Bank, “America’s Most Convenient Bank,” is a leading retailer of financial services with 300 convenient stores in New Jersey, New York, Pennsylvania and Delaware. For more information about Commerce, please visit the company’s interactive financial resource center at commerceonline.com.