Home' Trinidad and Tobago Guardian : January 8th 2015 Contents BG20 THE ECONOMIST
BUSINESS GUARDIAN www.guardian.co.tt JANUARY 2015 • WEEK TWO
Back in November, eight out of 10 voters told
exit pollsters that they were worried about
the economy. That is one reason why the
new Congress, which will convene next
week, is dominated by Republicans.
Nonetheless, there is mounting evidence that the benefits
of the economic recovery, long concentrated among the rich,
at last are spreading to ordinary Americans.
On December 23 GDP growth for the third quarter was
revised up to 5.0 per cent, its fastest pace since 2003, having
grown by a nearly-as-impressive 4.6 per cent in the second
quarter. To be sure, America is making up ground lost in the
first quarter, when GDP actually shrank because the weather
was awful and companies cut inventories.
For the past 12 months, GDP is up 2.7 per cent, which is
respectable but not amazing. Forecasters surveyed by The
Economist think that the American economy will grow 3.0
per cent next year.
Economists have projected similar growth rates since the
recovery began, only to be disappointed. Growth has averaged
only 2.3 per cent since the recovery began in July 2009.
This time, though, they have hard evidence on their side.
Some 321,000 jobs were created in November, compared with
a monthly average of 194,000 during 2013. Despite this,
inflation has fallen. The Federal Reserve thus can continue to
keep monetary policy unusually loose, and asset prices are
soaring. The Dow Jones Industrial Average passed 18,000 for
the first time shortly before Christmas.
Consumer sentiment has grown jollier in recent months,
as jolly as it has been since before the recession, according
to experts at the University of Michigan in Ann Arbor. For
several reasons, the good mood is likely to last into 2015.
One is the composition of recent growth: It is the result
of solid household spending, the most important component
of demand. It grew at a 3.2 per cent annual rate in the third
quarter, and may grow 4.0 per cent or more in the current
quarter, Morgan Stanley reckons.
Two powerful tail winds are helping. The first is the big
drop in the price of oil, from US$110 per barrel in June to
below US$60. Cheaper gasoline holds down inflation and
leaves American consumers with more money to spend on
other things. Although America produces more oil and imports
less oil than five years ago, it remains a net importer. Saudi
Arabia seems willing to tolerate even lower prices to protect
its market share, so the boost may last.
The other, even stronger, tail wind is growing incomes. Job
growth is accelerating, and there are signs, albeit faint ones,
of an uptick in wages. America s underlying potential growth
rate has slipped in recent years, from 3.0 per cent or more
a decade ago to around 2.0 per cent, thanks to a slower-
growing work force and lackluster productivity. Thus any
growth rate above 2.0 per cent helps to use up spare capacity.
Labor-market data confirm this: Non-farm employment grew
faster in 2014 than in any year since the 1990s, and unem-
ployment has fallen to 5.8 per cent. Based on current trends,
it could drop close to 5.0 per cent within a year, less than
many estimates of the natural rate of unemployment, the
point at which a labor shortage puts upward pressure on wages
The median household s real income was up 1.2 per cent
for the first 11 months of the year, according to Sentier Research,
a private firm, a marked acceleration from the previous two
years. That barely dents the 8.0 per cent drop in median
incomes between 2008 and 2011, but it does suggest that the
expansion finally is reaching ordinary households.
Thanks to cheaper oil, the Federal Reserve now thinks that
inflation will end next year around 1.3 per cent, according to
projections released on December 17, and will not return to
2.0 per cent, its target, before 2018. As a result rates could
rise either later, or more slowly, than currently expected. The
Fed promises to be "patient" about tightening monetary policy.
Fed chairwoman Janet Yellen told reporters that she would
like to see unemployment fall below its long-run natural rate,
in the hope that this might nudge wages and prices higher.
A combination of robust underlying growth and a patient
central bank is catnip to investors, hence the buoyant Dow.
It is a cocktail reminiscent of 1998, when the Asian crisis sent
both oil prices and bond yields down m, which goosed Amer-
ican growth and stock prices. What hurt the world helped
For the past six years, Republicans in Congress have argued
that America must cut public spending to bring dangerous
deficits and alarming public debt under control. Now the
budget deficit has fallen below its average of the past 40 years,
as a share of GDP, and perkier growth is making the national
debt look more manageable. Republicans still are arguing for
spending cuts, of course, but now they have to convince voters
that smaller government is better.
It may seem obvious that a stronger economy would rob
Republicans of one of their best arguments for change in the
White House in 2016, and would give Democrats a boost as
they gear up for the election. The political effects of a stronger
economy are unpredictable, however. Plenty of candidates
have lost despite, rather than because of, their party s recent
Hitherto an economy that has delivered soaring corporate
profits but done little for median wages has fired up Democratic
activists and tempted them to push for a populist platform
in 2016. As the benefits of recovery finally start to spread,
however, a campaign based on economic disillusion looks less
like a winner.
@2014 The Economist Newspaper Ltd. Distributed by the New
York Times Syndicate
A Happy New Year
for America's economy
A Happy New Year
for America's economy
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