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Thursday, December 08, 2005

Economy "Galloping" Along

(Hat tip: Instapundit)

Not only is the economy booming, but it's doing so in a shocking fashion:
The economy's resilience is especially evident in the latest update on growth from the Bureau of Economic Analysis. The BEA's second look at third-quarter gross domestic product showed that the economy grew by a robust 4.3% annual rate, even with the business shutdowns caused by Hurricanes Katrina and Rita. And real GDP in the fourth quarter appears to be increasing at a healthy pace of greater than 3%. For all of 2005, real GDP is on track to expand by 3.7%.
All good signs. But it gets better:
That's a bit higher than the 3.5% projected by the economists surveyed by BusinessWeek at the end of 2004. But what's more revealing is that the consensus forecast was predicated on oil prices slipping back to $39 per barrel by now and the Federal Reserve hiking its target for the federal funds rate to only 3.4% by yearend. Instead, oil remains well above $55 and fed funds have already reached 4%, with more hikes on the way.
And yet, GDP is up. The article goes through a number of reasons for this, but there's one telling paragraph:
MUCH OF THAT STRENGTH, surprisingly enough, will be concentrated in the consumer sector, which has weathered the shocks of 2005. The GDP revisions show real consumer spending increased at an annual rate of 4.2% in the third quarter. That's better than the 3.9% pace previously estimated, and it occurred during a quarter when gasoline prices hit more than $3 per gallon.
This really shouldn't be so surprising. Whereas in past years, consumers who were getting hit were stuck, with the Bush tax cuts, those same consumers are now holding on to an extra thousand dollars or more - and they are able to spend it. Another reason is simple optimism about the economy, despite articles by the New York Times that try to cast doubt (previously discussed).
One reason consumers may be willing to spend is because they are feeling more optimistic about the economy. The Conference Board's index of consumer confidence jumped to 98.9 in November from 85.2 in October. The nearly 14-point gain was the biggest increase in 2 1/2 years. The indexes covering current economic conditions and consumers' assessment for the next six months both rose sharply.

The board attributed the upbeat sentiments to a more than 40 cents drop in the price of a gallon of gas and better job growth. Fewer households rated jobs as "hard to get" in November. By the end of the month, regular gasoline had dropped to an average of $2.15 nationally, and it had dipped below $2 in some parts of the country.

While the article has plenty of other good points, and is worthwhile reading, the closing line is excellent:
With strong earnings fueling capital spending, and with improving confidence and better job markets powering consumer outlays, overall demand will be strong enough to energize the economy heading into 2006. And while only time will tell if the Colts will remain unbeaten, little in the data suggests that the economy will be thrown for a loss anytime soon.
I don't think the Colts are going to lose anytime soon, either.

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3 comments:

  1. I wonder how much credit Bush really deserves for the economy's success. Sure, the taz cuts help, but the fact that people are investing is not necessarily only a product of those tax cuts. There is some validity to the article in The New York Times. For whatever reason, people are optimistic about the economy. Republicans need to be careful and remember what they constantly said during the strong economic era of Clinton's presidency (He doesn't really deserve the credit). Basically, Bush should be applauded for the tax cuts and other efforts to revive the econonmy...but there are many other varibales in the equation.

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  2. But that's not really true: There's no one sector that is surprisingly strong, such as the tech stocks were in the 90's, that is dragging the economy up. Instead, we see the strong growth of small businesses (and large ones), primarily due to the money they have being constantly reinvested. A lot of companies are giving out far more dividends than they were before: And a lot of people are reinvesting those dividends (mostly automatically) back into the company, so the company still has all that money to work with. This, too, promotes higher growth.

    The largest difference is that there is no bubble to burst in this case - it's good, strong, STABLE growth. Consumer confidence could slow it, as could a host of other factors. But only a major disaster or major fraud could really hurt; and GDP went up strong DESPITE Katrina in the 3rd quarter (which is actually quite amazing).

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