Rising exports and falling oil prices have kicked the US economy into a higher gear.
This news comes at an opportune time, since it helps to offset continuing weakness in the housing market and raises hopes that America's gaping trade deficit could fall this year.
The nation's output of goods and services grew at a 3.5 percent annual pace in the final quarter of 2006, higher than many economists had predicted.
Just as important, the report on US gross domestic product (GDP) raised no new concern about inflation. Consumer prices, as measured by the report's gauge of personal consumption expenditures, rose at an annual pace of 2.1 percent. That's slightly above the Federal Reserve's comfort zone, but it suggests that the Fed is succeeding in taming inflation pressures.
"We seem to be having an almost perfect 'soft landing,' " says Rajeev Dhawan, director of the economic forecasting center at Georgia State University in Atlanta. "GDP growth is not too bad, and the inflation numbers have really moderated."
The current economic expansion, which began in 2001, hasn't been a barn-burner in terms of job growth. Like the early 1990s, it was at first dubbed a "jobless recovery." But the economy has marched forward, and the unemployment rate has fallen to just 4.5 percent.
As the expansion gained momentum, the Fed shifted from its stimulative stance on interest rates, raising the short-term rate gradually to its current 5.25 percent. That's designed to pilot the economy for a soft landing – maintaining growth while ensuring that inflation doesn't pick up – and it seems to be doing the trick.
"The Fed has the economy where it wants it," Nariman Behravesh, chief economist of Global Insight in Lexington, Mass., wrote in a report Wednesday.
The GDP news came as the Fed was finishing a two-day policy meeting. The central bank was expected to hold its interest rate steady when the meeting finished, after the Monitor's press time.
Wednesday's report means that GDP grew by 3.4 percent for the full 2006 calendar year, up from 3.2 percent in 2005. Economists generally expect somewhat slower growth this year.
The strong fourth-quarter output came from several factors:
• Exports rose 10 percent.
• Imports fell by 3 percent, which adds to GDP because foreign-made goods are subtracted when the government tallies America's output.
• Consumer spending rose 4.4 percent, a faster pace than in the third quarter.
The improvement in trade reflects a strong global economy. The worrisome US trade deficit – the amount by which imports exceed exports – will begin to shrink for the first time since 1995, predicts Diane Swonk, an economist at Mesirow Financial in Chicago. The record trade gap is one reason Democrats in Congress are pushing for more scrutiny of the impact of globalization on the economy – the subject of a House hearing this week.
President Bush, outlining his economic agenda in a speech on Wall Street Wednesday, touted a strong economy that is benefiting from open trade. "I know there's going to be a vigorous debate on trade, and bashing trade can make for good soundbites on the evening news, but walling off America from world trade would be a disaster for our economy," he said, urging Congress to renew his fast-track authority for negotiating trade agreements.
Business spending on new equipment fell a bit, in Wednesday's report. "If that does not pick up, then that would mean that the future growth of the economy goes away," says Mr. Dhawan. "Investment today means jobs tomorrow."