Harris economist: U.S. moving toward full employment

October 21, 2004

According to the Outlook 2005 report released by Harris Bank's chief economist, the U.S. recovery train remains on track toward its destination of full employment, despite losing some steam amid rising energy costs. After expanding at an outsized 4.4 percent in 2003 on a fourth-quarter-over-fourth-quarter basis, the economy appears to be proceeding at a 3.9 percent rate this year.

"Though moderating from last year's rapid pace, growth has been high enough to reduce the jobless rate gradually, even in the face of phenomenal productivity gains," said Tim O'Neill, chief economist, Harris Bank. "Growth is poised to moderate somewhat in 2005, though remain above potential."

Continued above-potential growth should allow the unemployment rate to drift down from an expected 5.4 percent in the fourth quarter of 2004 to 5.1 percent by the end of 2005 and to 5.0 percent by late 2006. This means the economy will be operating at "full employment"—the jobless rate associated with stable inflation pressures in the long run—in about two years time.

Provided the growth remains at or above potential, the Federal Reserve is expected to continue lifting rates in bite-sized steps at each of the next four policy meetings through March 2005. "By then, with a full 175 basis points of tightening under its belt, policymakers will likely sit back to assess the impact of their actions on the economy," predicted O'Neill. "But by the fall of 2005, the Fed should resume its tightening cycle, slowly guiding the federal funds rate to a more neutral level of 4.5 percent by the fall of 2006.

According to the report, world growth likely will be near 5 percent this year, largely because of the broad-based monetary easing that took place in response to the global slowdown of 2001-02. The strength in the Chinese economy also has been a key factor in sending growth higher in neighboring economies, particularly Japan. With the expansion on solid footing, most central banks have begun to raise interest rates, normalizing the extraordinarily easy monetary conditions in place.

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