Brooklyn's Progress
December 2004

By Joel L. Naroff, Ph.D.

What a wild month. Uncertainty reigned as we faced a tight presidential election being waged in the midst of major questions about the economy. Was the job market ever going to turn around? Would oil prices continue to soar and scuttle the economy? Would the Federal Reserve signal that it was getting worried and halt its interest rate increases? The answers were all the right ones: Yes, no and no.

The failure of the economy to create large numbers of jobs has been one of the two major concerns over the sustainability of solid growth – the second being energy costs. And after a weak September employment report, there were real worries. But we should never panic over one report. 

The distress of one month ago was replaced by the euphoria of a surging October jobs release. The economy created a massive 337,000 new positions and the soft September numbers turned out to have been better than originally thought. We just may be back in the job creation business. 

We cannot overestimate the importance of a stronger labor market. As we enter the critical holiday shopping season, businesses need households out there shopping “’til they drop.” Without the income coming from more people working, there was little prospect of that happening. If job gains are sustained, however, retailers just might be smiling.

Will people buy like crazy this year? The prospects are unclear, as energy prices remain extremely high. Oil did drop back below $50 a barrel, but that is no consolation. Gasoline costs are still sapping consumer spending power and there is little prospect that will change anytime soon. And now that the winter is at hand, heating costs could create a double-whammy. We really need lots of new jobs to pull us through.

In spite of everything, the economy is still moving forward. Growth was nearly 4% and that is not too shabby. The Federal Reserve, seeing that consumers are buying, especially new homes, businesses are investing and of course the government is spending like crazy, decided to raise interest rates once again. Although no one likes higher rates, think of the increases as a confirmation that the economy is still in good shape.

Which bring us to the election. There are significant economic challenges facing Mr. Bush in his second term, not the least of which is the deficit. We hit a record of nearly $413 billion this past fiscal year, created in part by double-digit spending increases. This huge chasm cannot be maintained. If there is another crisis, we don’t have the fiscal flexibility we had four years ago when we ran a $263 billion surplus. Returning fiscal sanity to Washington needs to be economic job one for the president.

During the next month, we should get a better picture of how 2005 will look. If the job gains are sustained, the outlook is bright. However, no good economy goes unpunished and interest rates would increase. But I think that is an acceptable price to pay for a strong economy.

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 http://www.commerceonline.com/.