Taking the U.S. Economy's Temperature

With 2005 over, Renee Montagne talks to David Wessel, deputy Washington bureau chief for The Wall Street Journal, about how the economy fared for the year.

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RENEE MONTAGNE, host:

The US economy enters the new year with substantial momentum, several big risks and soon a new chairman of the Federal Reserve. To talk about the outlook, we turn to David Wessel, deputy Washington bureau chief of The Wall Street Journal.

Good morning.

Mr. DAVID WESSEL (The Wall Street Journal): Good morning, Renee.

MONTAGNE: There are a lot of ways to measure how well the US economy is doing. What do the latest numbers suggest to you?

Mr. WESSEL: Well, if you look at the usual measures, the economy's doing pretty well. The important Christmas sales season was not great but OK. The unemployment rate is now down to 4.9 percent, which is back to where it was before September 11th. The pace of economic growth is reasonably good, a little better than 3 percent in the fourth quarter, which just ended; probably even better than that in the first quarter. I mean, basically, we've had hurricanes, we've had energy shocks and the US economy has been surprisingly and impressively resilient. We're doing OK.

MONTAGNE: And despite all that, polls show that the public isn't giving the president very high marks for his management of the economy. How come?

Mr. WESSEL: Well, that's a good question. When you recite all the numbers, it's a little bit like going to the doctor and the doctor tells you that your heart rate is OK and your pulse is OK and your EKG is OK and all your lab tests are OK, and you say, `But I don't feel well.' And I think what we're seeing is that people aren't feeling well. They're not feeling well because, for the typical worker, wages aren't going up very much. What raises they are getting all seem to end up in health-care costs. The headlines are very disturbing; we have these icons of American business, GM and Ford, which may go bankrupt. Big companies like IBM and Verizon are doing away with their old familiar pension plans. And people, I think, are genuinely worried about their jobs and their children's jobs and basically whether the US economy in the face of stiff competition from places like China can continue to deliver as it has in the past.

MONTAGNE: Well, you know, the White House doesn't control the economy as much as the public might think, but what could the president do, or the new Fed chairman, who could have a big impact on the economy? What could they do about that?

Mr. WESSEL: Well, in the short term there's not much the president can do, and that's why what you see from the White House and the Republican leadership is a lot of talking about, trying to convince people to feel better about the economy. In the long term, a lot of these issues do have to do with government policy about education and taxes and deficits and planning for retirement and health care and all that.

The new Fed chairman is in a different position. The Fed has a lot of influence on the economy short-term, and if the economy is weakening, the new Fed chairman may not have to raise interest rates any more than Alan Greenspan has already.

MONTAGNE: What do you see as the biggest risks right now?

Mr. WESSEL: I think the very biggest risk is that the housing bubble bursts and housing prices stop rising or go down, and that leads people to spend a lot less money on goods and services than they have been, because one thing that we know, wages have not been going up very much. People have been spending, and the biggest reason is their houses are worth more. They can take home equity loans and they feel good about their finances because their houses are so valuable.

MONTAGNE: Housing bubble, David?

Mr. WESSEL: Well...

MONTAGNE: Some people say it isn't a bubble.

Mr. WESSEL: That's true. It may not be a bubble. You never know until after the fact. But housing price appreciation has been extraordinarily strong in the past couple of years, and it seems unlikely that'll continue.

MONTAGNE: So when you talk about risks, what else?

Mr. WESSEL: Energy prices are on the way down now, but that's not guaranteed. More instability in the Middle East and energy prices could go right back up. The bond market is sending some weird signals that it's more worried about the future of the economy than most of the forecasters are. They may see something about recession that the rest of the people don't. And then there's always the risk that foreign investors will decide that prospects for their portfolios are better in Europe or Asia and they may not be willing to lend us so much money, and that would mean higher interest rates and slower growth here at home.

MONTAGNE: David, thanks very much.

Mr. WESSEL: You're welcome.

MONTAGNE: David Wessel is deputy Washington bureau chief of The Wall Street Journal.

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