Saturday, October 29, 2005

A robust economy?

This piece by Adam C. in RedState discusses yesterday's announcement showing the economy is growing even faster than realized: the third quarter the economy grew at an annual rate of 3.8% well above the long-run average of 2.5%. Core inflation also dropped down to 1.3% from 1.7% last quarter. This marks another in a several year growth spurt that is similar in scope and size to the late 1990s. There are still worries about the housing market and the twin deficits, but so far the economy is still growing at an impressive rate despite those fears.
I'm pretty much in agreement. Although there may well be localized problems, especially in the property market, it appears that nationally, the economy continues to boom along. Not that everything's coming up roses just yet. There does appear to be lingering weakness in the labor market. At least wages don't seem to be rising at a fast clip. But even that trend seems to be in keeping with the way the economy works that day.

As I replied to one commenter who was skeptical of the economy's strength, especially with regard to jobs and wages: Strong GDP growth almost always does translate into more jobs and higher wages eventually, once this growth begins to effect the labor market. This expansion is still relatively young -- we're just finishing our 4th year. We're at about the same point we were back in late '94 or so during the last expansion, and as I recall, the big gains in wages and employment didn't really begin to accumulate until Clinton's second term.

I believe various megatrends are conspiring to produce weaker and shorter recessions (thankfully) followed by longer and stronger expansions (again, thankfully). But it seems that contemporary expansions, while stronger and more robust once they get going (not to mention more durable), tend to be a bit tepid at the outset. This may be largely attributable to the mild, short recessions we now get -- i.e., there isn't much of a nasty low from which to sharply rebound.

So, the net-net is that our recoveries (the earliest part of the expansion) seem a bit weakish at first, and this is reflected in wage growth, which takes a while to get going. But once our economy does rev up, it is capable of creating wealth and prosperity on a scale unmatched in human history.


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