The unusual normally gets the attention of the news media, and when the unusual pertains to the economy, even more ink and broadcast time is often devoted to the situation.
So much doom and gloom has been written about oil prices, deficits, and interest rates, it is particularly pleasing to observe at least some attention now being given to positive economic developments in the US, as well as around the world.
Recent reports note that for the first quarter this year, the nation’s gross domestic product expanded at an annual rate of some 4.8%, the fastest growth of any major industrialized nation. This hike is more than double the 1.7% recorded for the last quarter of 2005 and is the highest growth rate in two and a half years.
To put it in a different perspective, except for the third quarter of 2003, the growth rate of the economy from January through March this year is the greatest quarterly jump during the presidency of George W. Bush, and that, as you recall, began in January 2001. Moreover, the first quarter 2006 economy upward tick might have been even more had it not been for the trade deficit which whittled about 0.8 percentage points from the total gain.
The nation’s rebound from the devastating hurricanes last fall has been quite noticeable in most areas of the economy, and much of the success is attributable to the ongoing advancement in productivity, or output per hour worked. For the first three months of this year, productivity has risen at an annual rate of 3.2%. Hourly compensation rose at 5.7%, more than double as in the previous quarter.
Additionally, consumer spending and business investment have had a significant share of the responsibility for most of the forward surge. In fact, personal consumption expenditures, which increased about 5.5%, were responsible for nearly 3.8 percentage points of the 4.8% economic output expansion.
Job growth has also played a highly substantial role in the advancement of the nation’s economy. From January to March, job gains have averaged about 200,000 per month nationwide; over the past year, the economy has created approximately 2 million jobs. The unemployment rate of 4.7% is currently lower than the average of the 1960s, 1970s, 1980s, and 1990s.
Not only has America been experiencing economic success, but the world economy has also been expanding, and expectations call for continual growth this year as well as next. Possible blemishes on future growth relate to volatile oil prices, the strength of the US dollar, and the imbalance of exchange rates. Nonetheless, these factors are not expected to stifle growth to any substantial degree. The past year saw the highest rate of global growth ever recorded, and 2006 is tracking clearly on its heels.
Over 70% of global economic expansion is now occurring in developing nations. Almost a third of it is in China, which is setting the pace of growth along with India and the rest of emerging Asia. There has also been rapid economic development in Latin America, the Middle East, and Africa. Moreover, Japan’s economy is recovering, and many parts of Western Europe are achieving an economic upturn.
Still, the US remains the driving economic engine for the world, and the momentum for the future is positive with little hint of increased inflation. However, we’re not on the yellow brick road yet. Numerous challenges continue to face us. The high energy prices are still of great concern and are beginning to affect various areas of the economy. If prices remain elevated over a lengthy period, they could have a negative impact on the nation’s economy.
Another concern relates to the need for the federal budget to be shaped appropriately so that it will be sustainable over the long term. In addition, there are health care issues, the war in Iraq, and political tensions in many parts of the world plus the cooling of the red-hot housing market to worry about.
The combination of the factors above will likely cause the US economy to slow down a bit the rest of the year and may encourage the Federal Reserve to leave well enough alone at its meeting in late June or shortly thereafter.
Miguel de Cervantes, the Spanish novelist who created Don Quixote in the late 16th and early 17th century, had a good idea. He said, and I’m paraphrasing, that each situation looks different depending on the color of the glasses through which one gazes. As I look toward the future, the color of optimism is my first choice.