Is the US Economy Breaking Out of the Doldrums to Lead World Growth

The US economy grew at a startling 5% annual rate in the third quarter, the fastest since 2003, led by consumer and business spending. The surge, which shocked many Wall Street analysts, seems to confirm that the American economy is steadily improving and doing much better than others around the world -- Europe and Brazil are struggling to avoid recession and return to growth, Japan has slipped into recession, China is struggling to manage its economic slowdown, and Russia has predicted a recession for 2015. The Dow Jones industrial average rose above 18,000 today, for the first time in history. And it could shape the Federal Reserve's decision about when to raise interest rates from record lows. ~~~~~ What were the Wall Street numbers today? The Dow Jones gained 64.73 points to end the day at 18,024.17 and the S&P 500 Index rose 0.2% to a record 2,082.17. Bloomberg reported that its Dollar Spot Index jumped to a five-year high as US oil surged 3.4%. The US economy expanded at an annualized 5% in the third quarter, beating the highest forecast among 75 economists surveyed by Bloomberg, as consumers and businesses spent more than estimated. Bloomberg says "a sustained pickup in US growth may anchor the global economy as Europe flounders and emerging markets, including China, cool." The annualized US growth rate was revised up from a previous estimate of 3.9%, the biggest advance in gross domestic product since the third quarter of 2003. While consumer spending rose more than previously estimated in the 3rd quarter, orders for US durable goods and purchases of new US homes unexpectedly declined in November. ~~~~~ What is driving the surge in the US economy? Much of the 3Q2014 increase came from consumer spending on health care and business spending on structures and software. An 88-straight-day fall in gasoline prices played a big part, freeing up money for Americans to spend on other things like cars, clothes and appliances. The 3rd quarter's economic expansion followed a 4.6% annual rate in the April-June quarter. The government separately reported Tuesday that in November, consumer spending rose at the fastest rate in three months and income at the fastest in five months. Both figures raised hopes for the 2015 economy. Gus Faucher, senior economist at PNC Financial Services Group told AP : "After four years of anemic recovery, the US economy is now hitting its stride, with a notable acceleration in growth in recent quarters. And growth should remain good next year, with lower gasoline prices a big plus for consumers." The University of Michigan said its index of consumer sentiment found that US consumers were more optimistic about the economy than at any time in the past eight years, but low gasoline prices don't seem to make up for lingering job weakness, a reason why the 3rd quarter housing sector was in negative territory. On another less than optimistic note, the University of Michigan it said factory orders for durable manufactured goods slumped in November. But it seems very likely that the US economy is showing resurgent strength and putting distance between itself and the rest of the world. ~~~~~ What will be the reaction of the US Federal Reserve to the latest US economic data? After its December meeting, the Fed said that it saw some evidence of continuing weakness in the US economy, leading investors to decide that there would be no rate increase before mid-2015, and so they bought stocks, driving them to record highs. But, the unexpectedly strong expansion reported today may make the Federal Reserve change its position and begin to raise rates as early as the 1st quarter of 2015, even though the Fed's key target, inflation, which it tries to manage to stay at 2% as a minimum, remains well below that at 1.2%. A major reason the Fed has held its benchmark short-term rate near zero since 2008 has been to try to raise inflation from excessively low levels, out of concern that deflation could take hold, causing a downward spiral of prices and wages. But, the Fed's artificially low benchmark interest rate has been criticized by experts who say the longer the rate stays near zero, the more destabilizing the recovery to normal interest rates will be for the economy. Most analysts foresee growth around 3% in 2015. That would still be the strongest expansion since the economy grew 3.3% in 2005, two years before the Great Recession began. But many other economists think growth is set to accelerate as more businesses have grown confident about hiring. The country is on track to have its healthiest year for job growth since 1999. In November, employers added 321,000 jobs, the sharpest one-month increase in three years. This would be a strong driver for the US economy, With more people working and with paychecks to spend, solid gains are expected in consumer spending, which accounts for about 70% of the economy. Third quarter consumer spending grew at a 3.2% rate, the best showing this year and a full 1% above the government's estimate. Business investment spending rose at a 7.2% annual rate, 2.1% above the government's previous estimate. Today's estimate was the government's third and final look at 3rd quarter growth in gross domestic product - the value of all goods and services produced in the United States. ~~~~~ Dear readers, if we can put aside the federal government's seeming effort to bolster the Obama presidency by inflating all sorts of economic indicators from jobs and unemployment to GDP and Obamacare enrollment and costs -- these 3rd quarter economic numbers look promising. They follow on from good 2nd quarter numbers, and Wall Street investors and analysts seem ready to believe that they are real. That in itself is a sea change from the past six years when every piece of good economic news was viewed with skepticism, which, by the way, turned out to be right. Today, Wall Street enjoyed the 5% growth number, even through their surprise, and they cheered the Dow as it opened and held above 18,000 all day. Now, we have to wait and see if the optimism sticks. I hope it does because the world badly needs a healthy US economy to lead it out of its wretched, continuing stagnation.