U.S. Economy in 2005: Inflation, Unemployment, and GDP

Introduction

This paper examines several key indicators of the U.S. economy as of mid-2005, including inflation, unemployment, GDP growth, and income distribution, drawing on data from the Bureau of Labor Statistics and the Bureau of Economic Analysis.

Inflation Rate and Consumer Price Index

The most widely used measurement of inflation is the consumer price index (CPI). In May 2005, the CPI decreased by 0.1%, after increasing 0.6% in April and 0.6% in March. In May, energy prices decreased rapidly after rising for three consecutive months. Price indexes for transportation also fell. The largest increases were recorded for medical care and recreation. The 0.1% decrease reversed a series of relatively large CPI increases. The annual rate of increase over the preceding three months was 4.6%, and over the last 12 months, 2.9%. Annual inflation rates for all of 2002, 2003, and 2004 were 1.6%, 2.3%, and 2.7%, respectively.

While a number of reports focused on the decrease in the consumer price index, caution should be taken in placing too much emphasis on any single month's change. In December 2004, the CPI fell by 0.1%, but since that point it increased at a faster rate than seen in the previous three years. Forecasters pay extra attention to the core index, as it tends to reveal more lasting trends in prices. The May results provide some evidence that rising energy prices had not significantly influenced the rate of increase in all other prices.

The unemployment rate at the time of reporting stood at 5.1%. Economists had expected the rate to remain at the 5.2% level seen in April 2005; however, the actual figure was not far behind. Deflation was not foreseen as a result of the unemployment rate at this level.

A recent Labor Department report showed that employers added 78,000 jobs in May, down sharply from the 274,000 jobs added to payrolls in April 2005. It was the smallest monthly job growth since August 2003, when only 2,000 jobs were added, according to revised figures from the Labor Department. Despite this slowdown in job creation, there were no significant inflationary or deflationary signals apparent in recent labor market reports. The structure of the labor market at the time did not suggest an imminent threat of cost-push inflation or deflation.

The current growth rate of the Gross Domestic Product (GDP) — the output of goods and services produced by labor and property located in the United States — increased at an annual rate of 3.5% in the first quarter of 2005, according to preliminary estimates released by the Bureau of Economic Analysis. In the fourth quarter of the prior year, real GDP had increased 3.8%. The major contributors to the increase in real GDP in the first quarter were personal consumption expenditures, private inventory investment, exports, residential fixed investment, and equipment and software. Imports, which are subtracted from the calculation of GDP, also increased during this period.

Unemployment and the Labor Market

Future GDP growth was projected to be almost entirely dependent on future gains in productivity. The productivity growth rate is not easy to forecast, partly because annual productivity gains fluctuate — falling at times to around 1% and rising at other times to around 3%.

The U.S. median family income was approximately $40,000 at the time of this report. The country had recently gone through an economic boom during which people prospered with significant gains, particularly those with greater existing wealth. This phenomenon was not limited to a handful of extraordinarily wealthy individuals. In 1997 alone, over 144,000 tax returns were filed with adjusted gross incomes of $1 million or more, illustrating the broad reach of high-income growth during that period.

Bureau of Economic Analysis. (2005). Retrieved June 19, 2005, from Bureau of Economic Analysis Web site: