Like Michael Jordan at his best, the economy turned in a truly great performance in the year’s first quarter and raised a basic question in the minds of many Americans: How long can it keep this up?
A government report Wednesday showing that economic growth surged at a surprising annual rate of 5.6 percent from January through March lent more support to the claims of some analysts that the economy could run faster for a longer time without igniting inflation.
“This is as good as it gets,” said Rob Shapiro, economist for the Progressive Policy Institute, a centrist Democratic think tank.
The first-quarter leap in growth was all the more astonishing because the inflation rate, as measured by the gross domestic product’s so-called deflator, was just 2.3 percent at an annual rate, although that was up from 1.5 percent in the 1996 fourth quarter.
The report came one day after the government said the quarter’s employment costs, such as wages and benefits, also remained well under control.
The 5.6 percent growth in inflation-adjusted GDP was the highest in a decade, not seen since Ronald Reagan was in the White House, and produced smiles on Wall Street and in Washington, where the White House and Congress are trying to hammer out a balanced-budget deal.
Robert Reischauer, former head of the Congressional Budget Office, said that such growth, if sustained over three years, would wipe out the federal budget deficit by showering the Treasury with so much new revenue it would even negate the need for any spending reductions.
But Reischauer and a host of other economists said such rapid growth simply isn’t sustainable for long and that, over time, the economy will settle back into its pattern of 2.5 to 3 percent annual growth. Inflationary pressures would build quickly if growth exceeded that general boundary by much, he said.
If the economy should be capable of long-term growth of faster than 3 percent, then it would be much easier for the government to balance the budget and afford new programs, such as expanded health-care coverage.
Robert Gordon, economist at Northwestern University, said that despite the conventional wisdom, the economy is much more productive than widely believed and can deliver faster, job-producing growth without inflation perhaps until the turn of the century.
He said the continued deceleration in health-care costs, largely because of an unabated managed-care revolution, and falling computer prices have helped keep inflation in check. At the same time that jobs are being created rapidly, he said, the labor force has been growing to snap them up.
Gordon said many of the new workers are most likely former welfare recipients and recent immigrants and added that they are preventing labor markets from reaching a tight, potentially inflationary state.
Whether America has reached what Gordon called a “watershed in macroeconomics” or has just experienced a blip in growth that will abate over time will be unknown for months, but the first-quarter performance likely will make the Federal Reserve Board’s job of assessing the economy much more difficult.
The central bank, responsible for controlling the flow of money into the economy at a rate that isn’t inflationary, has been considering another increase in interest rates to cool down the economy. It raised rates slightly in March, and its policymaking committee meets again May 20.
Reischauer and William Niskanen, chairman of the Cato Institute, a libertarian think tank, agreed that the Fed shouldn’t increase interest rates now, but not for the same reasons that Gordon gave.
The fact that another report this week showed a decline in durable-goods orders indicates the economy may soon cool down on its own, Reischauer said.
“I don’t think this report triggers the kinds of concerns about inflation that would have happened in the past,” added Niskanen, a former member of Reagan’s Council of Economic Advisers.
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The report raised the intriguing possibility that government measurements of real economic performance are inaccurate, akin to having a basketball scorekeeper who is not good with numbers.
Niskanen, Reischauer and Shapiro said that what the figures could be indicating is that the economy’s productivity, its sheer efficiency in producing goods and services, is rising more rapidly than the government’s official indicators show.
A higher level of productivity than reported by the official statistics–which is Gordon’s point–could explain the modest inflation rate occurring while the economy booms, they said.
If faster growth were to continue without inflationary pressures, Shapiro said, the unemployment rate could fall more, the economy could grow faster and “we could have a somewhat easier monetary policy than we thought.”
But, although the news is encouraging, Shapiro said, “The best that one can say is that the jury is out.” And, he said, the temptation that Fed officials might have to pump more money into the economy would be a mistake until more evidence is in.
The economy’s first-quarter performance renewed the debate over just how low the jobless rate can go without causing tight labor markets and increasing inflation. Years ago, this rate was thought to be 6 percent unemployment. Now, with the jobless rate just above 5 percent, inflation has shown few signs of any sharp acceleration.
As long as enough workers flow into the economy to take the jobs created by higher growth, Gordon sees little danger of accelerating inflation. He called this increase in labor supply a “major gift to the Federal Reserve Board.”
Wednesday’s GDP report showed that consumers were highly confident and loosening their wallets. Consumer spending charged ahead at a 6.4 percent annual rate, the fastest since the first quarter in 1988 and nearly double the fourth-quarter rate.
Residential construction increased at a 5.5 percent annual rate, while investment in capital goods, such as factory equipment, climbed 12.9 percent. Government spending declined slightly. Imports jumped sharply, by 21.9 percent, highest in 13 years, while exports increased by 8.1 percent.
In Chicago, a monthly index of regional manufacturing activity slipped slightly in April, a sign that Midwestern factories had curbed production by a notch. But analysts said factory output in the region will remain at a high level.
The Purchasing Management Association of Chicago said its overall index fell to 57.2 in April from 57.5 in March. Any reading above 50 on the index means manufacturers reporting improved business conditions outnumbered those reported worsening conditions.
The association’s regional inflation index showed falling prices.