Brooklyn's Progress
January 2005

By Joel L. Naroff, Ph.D.

Thanksgiving was a time to take stock and there were reasons to be pleased. The economy seemed to have finally shifted into a solid sustainable pace. Housing was perking along and manufacturers were beaming. But just when it seemed safe to say that everything looked good, we discovered that employers were just not ready to open their doors to many new workers. And that bearer of bad news – Fed Chairman Alan Greenspan – raised a new warning, this time about the dollar. In other words, nothing is certain about the economy except uncertainty.

The economy remains in good shape, for the most part. With mortgage rates low, builders are building and buyers are out there scooping up everything they can – or cannot – afford. Home sales remained near record highs in October and prices surged. If the strong permit numbers are any indication, this sector should be solid for a while.

But it wasn’t just the usual good news coming from the housing market that raised hopes. The manufacturing sector continues to benefit from solid orders for most types of products. And the outlook looks good as the dollar keeps falling. The weaker the dollar, the cheaper our goods are overseas. As a result, exports are growing. 

As is always true with economic issues, the falling dollar also holds some risks. This was clearly pointed out by Mr. Greenspan. A rapid drop in the dollar’s value could trigger rising inflation if foreigners are forced to raise their prices. That could trigger a jump in interest rates. The problem is that the resulting mortgage rate increase would slow the housing market.

But the worries about the dollar remain just that, and so December arrived with great expectations that the jobs data would make everyone jolly. Well, wrong again. Hopes that the labor market had finally turned the corner were dashed as job gains fell back to mediocre levels. That is not to say conditions are weak. It’s just that after an October surge of 303,000, the November 112,000 increase was a clear disappointment.

The soft employment report once again raises questions about the strength of the labor market and whether enough income will be generated to create strong growth going forward. But we shouldn’t jump to conclusions. It’s hard to get a really good reading on employment during the holiday season because any delay in hiring gets magnified. Also, the unemployment rate eased to 5.4 percent, hinting that the labor market is simply not that bad. Looking forward, there is every reason to believe that job growth will be decent enough to support moderate economic growth in 2005. 

Because questions have been raised about the labor markets, the December employment numbers will be the most anticipated data we will get over the next month. But what might be even more important is the price of oil. If the recent declines are sustained, then some of the uncertainties could be removed. That would really get us going.

Joel L. Naroff, Ph.D., is Chief Economist for Commerce Bank. Commerce Bank, “America’s Most Convenient BankÒ,” 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 http://www.commerceonline.com/.