The American economy is a tricky beast. Just when pessimists on the left (Too much inequality!) and downers on the right (Too much Obama!) had written the economy off, it goes and posts its best showing in more than a decade. The nation's gross domestic product, adjusted for inflation, grew by a white-hot 5 percent in the third quarter — revised upward from a 3.9 percent initial estimate last month — according to the Commerce Department. That's the fastest growth since summer 2003, and comes right after an almost-as-strong 4.6 percent gain in the second quarter. Punch it, Chewie!
Alas, almost no one expects such a torrid pace to continue. Over the past generation, long periods of such ultrafast growth have only happened right after the deep 1981-82 recession and during the 1990s internet boom. And they've been really rare in the 2000s. From 1981 through 2000, there were 21 individual quarters where the economy grew by 5 percent or faster — but just two quarters of such fast growth since, including this most recent one. Indeed, the recovery from the Great Recession has been so anemic that many economists have wondered whether slow growth was the "new normal" or a "permanent slump."
So the big question is whether the economy's recent strong showing is a harbinger of something significantly better than the 2 percent average annual growth we've since 2009. And good news! It probably is for awhile, thanks to the American consumer.
One big reason for the huge upward revision was better-than-expected consumer spending, thanks to more jobs, higher incomes, less personal debt, and lower gas prices. Going forward, there are already signs wallets will remain open. First, consumer sentiment now stands at the highest level since January 2007, which "should bolster big-ticket consumer purchases in the fourth quarter," according to Barclays. What's more, new government data shows real consumer spending rose 0.7 percent last month, "the strongest monthly gain since the cash-for-clunkers boost in August 2009," according to JP Morgan.
Second, oil prices continue to fall, down 50 percent since August. Citi estimates that the annual income boost to consumers is now $1,150 per household, or more than 2 percent of the median family income. And Goldman Sachs thinks cheaper energy means economic growth will be as much as a half a percentage point faster next year than it would have been otherwise. Cheap energy may slow the shale revolution, but it is great news for everybody who isn't a petro-state dictator.
All of this adds up to a pretty clear forecast: It's reasonable to expect the U.S. economy to grow next year at its fastest pace since before the 2007-2009 financial crisis, maybe around 3 percent or so.
Good news, to be sure, but that's really still just catch-up growth after the Not-So-Great Recovery, not mention that nasty storm last winter that sent the economy into the freezer.
Most economists think America's long-term potential growth rate will fall prey to slowing population growth and less innovation, outside of smartphone apps. And even higher GDP growth isn't a cure-all if most of the benefits go only to a few. Policymakers need to build on this recent economic upturn with policies to reform K-12 education, improve college access and completion, repair our infrastructure, and lower barriers to business startups.
Washington, you have your 2015 to-do list!