Heading into the middle of 2005, the economy appears to be struggling. While the annual forecasts from January have not changed, first quarter data reveals a growth in real gross domestic product (GDP) of 3.1 percent, a slowdown from the 3.8 percent of the previous quarter. Additionally, several leading economic indicators show some disquieting trends, particularly housing starts, wholesale, and consumer prices.
According to the Department of Commerce, housing starts – residential building construction projects begun during a month – decreased in March by 17.6 percent, the largest drop in 14 years. The number of housing starts has a direct effect on the revenues of the construction industry, in which Hispanic businesses and workers are heavily represented.
Inflationary pressures continue. The producer price index, which measures changes at the wholesale level in order to foresee retail price increases, has shown a rising trend through the first part of 2005. Energy costs alone, driven by the higher price of crude oil, showed a 3.3 percent increase in March. Prices of finished energy goods, the energy sold to households including gasoline, home heating oil, residential gas, and electricity, showed an increase of 15.9 percent over the first quarter of 2005.
Consumer prices also have increased, at an annual rate of 4.3 percent in the first quarter of 2005. According to the Bureau of Labor Statistics, this is the highest seasonally adjusted annual rate of inflation since before 1998, driven by a 21.1 percent increase in energy costs, which also contributed to a 10.3 percent increase in transportation costs.
As significant U.S. military expenditures continue, the budget deficit continues to grow. Combined with decreasing government revenues as a result of tax cuts, the deficit could cost taxpayers billions of dollars, as more U.S. debt ends up in the hands of foreigners and at the mercy of international markets.
The Congressional Budget Office estimates that the interest paid by taxpayers on the national debt (the sum of accumulated yearly deficits) will rise to $348 billion in 2005. The debt itself is currently nearly $8 trillion, according to the Bureau of the Public Debt. Covering this debt would have required nearly $12 trillion, or 65 percent of the 2004 U.S. GDP.
The U.S. dollar has been losing value relative to other major currencies, such as the yen and the euro. As the dollar depreciates, imports become more expensive to Americans and U.S. exports become more affordable for consumers abroad.
One positive impact of the dollar's position may be a shrinking of the trade deficit, which had hit record levels. Although the total U.S. trade deficit was $61 billion in February, the trade deficit with China (the country with which the U.S. has the largest trade imbalance) actually showed a decrease, according to Department of Commerce data. At the same time, the trade deficit with the Organization of Petroleum Exporting Countries (OPEC) increased to $6.3 billion from $6.1 billion in January, due to higher fuel prices.
As the Fed contends with evidence of inflationary trends and the government grapples with financing its ballooning debt, interest rates will undoubtedly increase. Higher interest rates will be required to stave off inflation and to make the return on Treasury securities sufficiently attractive for much-needed foreign investors to continue holding assets in U.S. dollars.
Over the first quarter of 2005, the number of individuals employed increased by 204,000, according to the Bureau of Labor Statistics. Unemployment has trended downward over this time, though the number of people not in the labor force also increased by 667,000.
This suggests that while there may be new jobs available, job searches are still difficult, possibly increasing the ranks of discouraged workers, who stop trying to find work and are no longer counted in the labor force.
This is also true in the U.S. Hispanic population. While the Hispanic unemployment rate fell to 5.7 percent in March from 6.4 percent in February, the number of Hispanics categorized as not in the labor force increased from 9,270,000 to 9,273,000.
The debate over the future of Social Security rages on. Since Hispanics have higher population representation in younger age groups, it is likely that current and future young Hispanic workers would be disproportionately affected by whatever changes are implemented.
The individual private accounts proposed by the current administration are a cause for concern for Hispanics for a number of reasons. Computer technology, which facilitates following market trends and brokering personal account transactions, is still part of the "digital divide," with Hispanics having less technological access and expertise than the U.S. population as a whole.
Hispanics also tend to keep fewer investment assets in the stock market, meaning that as a group they have less experience and information about the market. Additionally, Hispanics have lower average incomes. The combination of these factors creates larger risks for Hispanics hoping to increase the value of their private accounts, and makes them more dependent upon these accounts for their retirement.
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