5-03-05, 9:21 am

From Labor Research Association

U.S. workers and their unions should brace for higher unemployment and greater downward pressure on wages for the remainder of the year.

Working families received two sharp blows as April drew to a close. On April 28, the federal government released new data on economic growth in the first quarter of 2005 that show that the economy is slowing and job creation is at a standstill. On April 29, Congress passed Bush’s disastrous federal budget for the 2006 fiscal year. The budget freezes spending for domestic programs and authorizes huge tax cuts for the wealthy.

The new data reported that real gross domestic product rose at an annual rate of 3.1 percent in the first quarter, down from the 3.8 percent reported for the fourth quarter of 2004. Forecasters immediately cut their second quarter GDP forecasts to 3.0 percent to 3.5 percent, down from earlier forecasts of close to 4.0 percent.

Growth in consumer spending slowed to 3.5 percent in the first quarter of 2005, down from 4.2 percent in the fourth quarter of last year. The decline in consumer spending knocked half a percentage point off GDP growth.

With real wages falling month after month, consumers are caught in a sharp squeeze. Real wages declined by 0.3 percent in February and by another 0.3 percent in March.

Nearly all of the slowdown in consumer spending can be traced to a sharp decline in purchases of durable goods. This decline reflects the early effects of higher interest rates and signals further deterioration in employment in the already troubled manufacturing sector.

First quarter 2005 growth in business investment plunged to 4.6 percent from the double-digit increases reported for the previous three quarters. Business spending on equipment and computers slowed considerably. New layoffs in the high tech sector will follow.

The sharp decline in business investment reflects growing reticence among U.S. corporations about the potential for future growth and indicates that any hiring may end abruptly in the second quarter.

A major buildup in inventories propped up GDP growth by more than a full percentage point in the first quarter. If the goods that were stockpiled were omitted from the calculation, GDP would have increased only 1.9 percent. This inventory accumulation will become a drag on growth in the second quarter and lead to layoffs in sectors where inventories are particularly high.

Exports doubled in the first quarter, with 7.0 percent growth reported, but imports increased 14.7 percent, undercutting any gains from higher exports. Given the sharply lower dollar, the 7.0 percent growth in exports is disappointing, and clearly marks the failure of the Bush administration’s low-dollar policy.

Any U.S. gains from the lower dollar – which makes U.S. goods cheaper abroad – have been cancelled out by the economic blow to trading-partner markets in Europe and Japan. Although it is clearly time for Bush to reverse course and strengthen the dollar, the administration refuses to do so. As Europe and Japan sink further into economic stagnation, U.S. exports will decline.

Part of the trend toward slower economic growth and low job creation in the United States can be traced to short-term instabilities and the general uncertainties surrounding inflation and oil prices. But it is also indicative of the long-term damage done to the economy by the Bush administration’s shortsighted economic policies and the fundamental weaknesses introduced by five years of misspending and mismanagement. The new 2006 federal budget passed by Congress guarantees that these policies will remain in effect.

Policies constructed to transfer more wealth to high-income groups and to fund the military buildup are now undercutting the prospects for long-term growth and development. The administration’s refusal to pursue employment growth and control health care costs has forced real wages down to recession levels.

In addition to the serious problems created by Bush’s tax cuts and the resulting federal deficits, the whole direction of federal spending under Bush threatens to perpetuate high levels of unemployment and derail the ability of the economy to respond to new global competitive conditions.

Federal defense spending remains almost unchanged in Bush’s 2006 budget, but sharp cuts in other forms of federal spending have removed all of the economic stimulus from the nondefense sectors. Bush has strangled federal spending for programs that support job creation, workforce training and the research and development projects needed to ensure the competitive standing of the U.S. economy.

The U.S. is falling further behind in the global rankings for research, workforce skills in science and technology, and higher education levels for the broad population. Japan, South Korea, Israel, Sweden and Finland all spend a higher portion of their GDP on research and development than the U.S.

The signs of another recession are on the horizon, and Bush’s policies will make the next recession much deeper and longer than the recession of 2001. The U.S. is already close to losing its competitive standing in the world economy, and may be only one recession away from a permanent decline.  

--© 2005 Labor Research Association