ECONOMIC ANALYSIS: Economy is doing great, but what about next year?

December 12, 2005

Here's a question the visually oriented news media face all the time-what does a strong economy look like? Belching smokestacks and humming assembly lines are the clichés of yesteryear, now that we've entered an era when knowledge and services account for more output than do physical goods. But somehow the picture of an office worker tapping on a keyboard or a group of executives huddled around a conference table doesn't quite convey the vitality and power of the world's largest economy.

Whatever your favorite visual metaphor may be, it's time to use it, because the news on the national economy has turned sweet. Shrugging off some hugely destructive summer storms, a record run-up in energy prices, and a still-tense situation in natural gas, a chorus of reports shows the U.S. economy entered the final quarter of the year in better shape than ever.

Much like fame, good economic news can be fleeting, but we might as well enjoy it while it lasts. And there is enough to keep almost every sector of the economy happy.

The Bureau of Economic Analysis got out its red pens and revised its estimates of overall economic growth in the third quarter sharply upward. The BEA now says the economy expanded at a 4.3 percent annual rate in the July-September period, the fastest growth we've seen in two years. Steady consumer spending and continued strong business spending were the biggest contributors.

A lot of that growth is coming from construction in some of the nation's redhot housing markets, which are less prevalent across Indiana. But much of it is also due to the continued strong performance of the industrial economy. Output from the nation's manufacturers rebounded strongly from a Katrinainduced slump in September, posting a robust 1.4-percent growth in October. Growth in equipment and fabricated metals production, both well represented in Indiana, was especially strong.

In a less publicized development, the Bureau of Labor Statistics reported that strong productivity growth resumed in the third quarter in the national economy, after taking a pause in the spring. Output per hour in the general economy grew a healthy 4.8 percent, with productivity in the durable goods manufacturing sector posting a high, 7.3-percent gain.

Those gains make the solid growth in hiring, as reported in the BLS' November jobs report, even more impressive. Not only did the overall U.S. economy add a respectable 215,000 net new jobs last month, but manufacturing managed to eke out an 11,000-job gain for the month as well. This follows two months of meager hiring economywide, but also suggests that the fourth quarter's growth, when it is published next year, will be healthy as well.

For economists, reading these upbeat reports makes us feel a little like Indianapolis Colts fans do as they read their Monday morning sports sections. Another great outcome, but what about next week?

The strength evidenced in recent weeks gives us confidence the new year will start on the right foot, certainly. But there is growing evidence that rising interest rates are beginning to put the brakes on at least some sectors of the economy. Housing, in particular, has shown signs of finally backing off its white-hot growth, with weakening home sales, fewer mortgage applications and rising inventories in some major markets.

The national industrial expansion that has been so good to the Indiana economy will also not go on much longer. But it's still going strong today.

Barkey is an economist and director of economic and policy study at the College of Business, Ball State University. His column appears weekly. He can be reached by e-mail at
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