In the often-bewildering lexicon of economics, the term “business cycle” is especially misleading. It implies that economists can predict the booms and busts of economic activity with the precision found at a laundromat–the wash cycle lasts 10 minutes, the rinse cycle 5, and so on.
In fact, most economists admit they’re miserable at predicting how long good times will last or when recessions will come. And they proved it again when most failed to predict the 5.6 percent jump in growth of the first quarter. It was the best three-month growth in nine years and far stronger than expected.
Now many people are asking: Are things really as good as they seem? How long can it last?
The first question is easy to answer: Yes. The country is in the seventh year of an economic expansion, and, instead of running out of steam, the economy soared in the first quarter. Consumers and businesses went on a buying spree, unemployment fell to 5.2 percent in March and inflation remained dormant.
The second question is far more problematic. Economists have been drumming it into us that the economy can grow at only 2.5 to 3 percent a year for any extended time. Any faster growth, they contend, would spark inflation and lead to a downturn. Now they’re asking whether fundamental changes in productivity and global competition have made it possible to grow faster, create jobs and hold down prices.
Despite the questioning, most aren’t ready to declare this business cycle dead. Federal Reserve Chairman Alan Greenspan, for one, isn’t ready to take a chance, and that’s why the Fed raised interest rates in March and could further tighten credit this month.
Likewise, the signals Thursday that Clinton and Republican negotiators have reached a deal to balance the budget should buoy financial markets and the economy. Happily, the unexpected growth spurt made the job easier by increasing tax revenues, which shrinks the budget gap.
The Fed could end all the elation, however, if it overreacts and steps too heavily on the monetary brakes. It would be better if the economy slows on its own, and it may be doing so. Trade is now a drag because a strong dollar is boosting imports while exports to major trade partners aren’t growing as fast. Debt-laden consumers may be cutting back on spending. In some regions, the supply of skilled workers may soon start to limit growth and employment gains.
For now, however, the economy is strong, and there’s no recession in sight. With any luck and continued prudence from Greenspan and Clinton, the expansion should continue. Enjoy.
