The economic recovery is gaining momentum, but many problems remain from the prolonged recovery.

Since the first three recession quarters of 2001, the economy has been in two years of economic malaise. At nearly any given moment, conflicting economic data signaled either a period of renewed economic prosperity like in the 1990s or a return to the recessionary levels of economic performance seen in 2001. Mixed signals confused professional economists and financial market analysts and repeatedly resulted in forecasts that were either wildly optimistic or pessimistic. Many of the forecasts were undoubtedly mixed with a confusing array of politics and business pressures.

As we enter 2004, most economic indicators have turned positive and are showing the impact of both monetary and fiscal policies that work to expand the level of economic activity (Table 1). Record low interest rates have been sustained throughout most of the last two years and have provided positive incentives for consumers and businesses to invest in housing and capital. Anyone wanting to buy a house or anticipating the need for capital would be foolish not to have invested unless they either anticipated a change in economic conditions, such as a job layoff, or simply could not justify the investment at any interest rate. Low interest rates should continue to be a positive stimulus to the economy in 2004. In fact, it is the fear that interest rates may begin to rise in 2004 that caused some of the rapid growth in investments during the last two quarters of 2003.

But, monetary stimulus is only one side of the equation. Record levels of deficit spending by the federal government are providing another form of stimulus for the economy. While much of the new spending has been limited to homeland security and defense, tax cuts in general have provided some marginal increases in spending for consumers and associated profits for businesses. Both the unconstrained spending and the tax cuts have combined to stimulate the economy and improve the economic outlook for 2004.

The positive forecast must be viewed with the realization that over the last three years, serious economic setbacks have occurred and will not be offset by one or even two years of sustained economic expansion. The stock market losses experienced by millions of households contributed to the economic slowdown and will not be offset with the gains experienced in 2003 or those expected in 2004. The wealth effect so frequently discussed as one of the factors that supported the expansion in the 1990s requires that households believe that the gains they obtain in the market are sustainable, and that the losses experienced since 2000 will not quickly reappear. Clearly, the spotty record of many companies, the inability of companies to effectively respond to the ethical question being raised by the public and the markets, and weak expansion of the economy have not been sufficient to engender a lot of confidence in our economic future.

The jobs actually lost and the associated insecurity generated by the threat of unemployment have seriously damaged the financial status and security of millions of households throughout the nation. The decline in job opportunities is only part of the story since normal growth of the labor force adds 1-2 million new workers annually with little hope of finding employment unless new jobs are being created. Since the recession started in 2001, over 10.9 million new and potential jobs have been lost to this economy. This estimate reflects both the 2.2 million jobs lost between November 2000 and November 2003 and the 2.9 million new jobs that were generated on average each year during 1993-2000. The 10.9 million job loss estimate represents 8.4 percent of total employment in 2003.

Sustained economic expansion is the only way to accommodate the new workers from the current population and the influx of immigrants from other parts of the world. Proposed policies to legalize immigrants who are already in the country and those who can find an employer to sponsor them are another step toward opening the borders to an unlimited number of immigrants. Those immigrants will compete with domestic workers (whether legal or not) for all types of jobs and will put further pressure on already crowded labor markets. Why do we need more workers when millions of jobs have been lost since 2000? Jobs with poor working conditions, low wages, and no benefits will not change if employers can simply recruit new workers every three years. Market conditions will only change if a shortage of workers forces pay and benefits up, forces employers to improve production processes, and forces consumers to pay realistic prices.

The jobless recovery has been one of the biggest economic stories of the last two years. This issue will lead the way in election-year economic conflicts among candidates and will result in calls for constraints on the movement of jobs and work to other countries. Outsourcing production and employment in an effort to obtain lower costs and higher profits is good economics, but frequently bad politics.

The loss of domestic jobs that were low-wage, labor-intensive production positions has been going on for decades and is the natural outcome of unconstrained economic activity. These losses were assumed to be manageable as long as the domestic economy generated enough new and higher wage jobs to offset the losses. Only those employees and businesses that were impacted negatively sought some form of protection.

Now the issue is attracting attention since the economy has not been able to generate new jobs, and the types of jobs being lost are higher-wage service, technical, and professional positions that are much more difficult to duplicate. Clearly, new calls for protectionist legislation will bounce around Washington, D.C., in 2004 and beyond. New concerns about NAFDA, the U.S. economy, and the well-being of Mexico will result in discussions of trade barriers and porous borders. International competition had both a positive and negative impact on the U.S. and Mexico. Only with sustained economic expansion will the labor markets of both nations be able to grow and prosper.

To offset the loss of 2.2 million jobs, the economy will have to generate approximately 183,000 jobs per month in 2004. This rate of job creation only returns the employment level back to where it was three years ago and does not account for the loss of potential jobs or the growth in the labor force during the period. From 2000-2004, the civilian labor force should have increased by nearly 5.6 million workers, given an average increase of 1.4 million over the last decade.

But, the labor market for most areas of the nation has stabilized. The job growth experienced in the last few months is a positive sign that the 2004 economy will generate new jobs, and those jobs will provide employment and income opportunities for workers across the nation.

Controversial outsourcing (domestic and international) policies and practices reflect structural changes in the ways employers operate in an increasingly competitive economic environment. These changes are nothing new. Unconstrained price competition will always encourage employers to seek the lowest cost production opportunities, and nothing short of self-destructive federal protectionist policies will change this practice. Workers in high-wage occupations will increasingly be threatened by lower cost and more productive opportunities to outsource, and the gains in higher profits, lower prices, or both will continue to occur at the cost of some domestic employment opportunities. Low-wage labor markets and labor markets with few highly skilled and highly educated workers will be those that are the most severely impacted by the changes that are occurring.

Rural labor markets that are not economically diversified and that have been heavily dependent on manufacturing have been among those most seriously damaged by the recession and the loss of jobs. Those areas are caught in the dual problem of an economic downturn with an inadequate and prolonged recovery and structural changes in the production arrangements of many manufactures. Communities faced with this dilemma must develop a new growth strategy that takes advantage of a modest cost labor force with good work ethics and hopefully abundant job skills. Those communities that have invested in promoting a high-quality system of education will find the adjustment easier than will other communities.

One of the unfortunate outcomes of several years of slow economic growth is that the financial condition of many families in the nation has become desperate. The rapid rise in debt (consumer debt hit a record level of $1.98 trillion in October 2003, according to the Federal Reserve Board) accompanied by job losses and negative pressures on wages and benefits has placed many families in or nearly in financial distress. The rapid increase in bankruptcies and late payments is simply a sign that many families are in a financial crisis as a result of poor financial decisions, poor decisions on the part of creditors, and the poor performance of the economy. Many doubt the old axiom that "a rising tide raises all boats," but few doubt the axiom that "a falling tide sinks the weakest boats first and holds them underwater the longest when the tide begins to rise."