Greg Ip is the editor for The Economist.
In his popular book, “The Little Book of Economics,” he says: “Every business expansion eventually dies. Only the cause of death changes.”
All economic expansions will indeed end at some point. The question is whether that point will occur in 2015. My quick answer is NO. For a longer answer, you will have to keep reading.
Every economist that thinks about business cycles, the booms and busts in the economy, knows that Greg Ip is correct. We secretly hope that we will find a secret elixir that will stave off all downturns, whether it is Quantitative Easing by the Federal Reserve, automatic stabilizers like unemployment insurance or income and profits taxes, or well-timed fiscal policy fixes by an adroit congress and President. But deep down we know that new “causes of death” to an economic expansion will someday appear whether it comes from large unanticipated rises in interest rates, credit markets that go haywire, massive storms, cyber-attack, or war.
But, like in life, even though we know that our own death will someday surely come, it doesn’t have to come in 2015.
The truth is that our U.S. economic growth has been slowly, very slowly, picking up steam. Often the monthly and quarterly variations hide the bigger picture.
The numbers in the chart above are annualized rates of change based solely on data from that quarter. So if output of goods and services rose 1 percent that quarter that would be given as a 4 percent annualized growth rate. That is why quarterly data look startlingly volatile. But a better way to think of growth is to find that actual annual growth rates, adjusted for inflation, or real GDP growth rates.
It will not be until Jan. 30 that we get the “advance estimate” report of what happened in the fourth quarter of 2014. Economists’ estimates range from 2.5 to 4.5 percent. With the 5 percent growth rate of in the third quarter, and with consumption seeming to be growing at a 4.5 percent annualized rate, I am forecasting a 4 percent growth rate in the fourth quarter.
Based on data from the U.S. Bureau of Economic Analysis using 2009 prices for real GDP, the US economy grew at 1.08 percent in 2012; it grew at 2.43 percent in 2012; and with my estimate for the fourth quarter real GDP growth of 4 percent we grew at 3.39 percent in 2014.
Not only is growth positive in all years since the end of the Great Recession of 2007-2009, but we are now growing at faster and faster rates. This is a story of momentum that is accelerating. Imagine the economy as a locomotive on a gradual hill. It starts to move and then picks up momentum. Everyone knows not to stand in front of a moving train. Once it gets rolling, it picks up greater power.
That’s what is happening to the U.S. economy. While outside forces of a rising dollar, rising interest rates, or war could have some impact, the best bet for 2014 is that economic train is gaining speed going into 2015 with real growth likely to accede the growth rates we enjoyed in 2014.
So, when stock analysts continue predict “more volatility” ahead or a “roller-coaster” ride for stocks as the Federal Reserve eventually raises the Federal Funds rate charged by banks to other banks, do not fret about the end of our expansion just yet. Stock analysts may be correct about stock prices, but the U.S. economy is the little engine that could.
Richard Marcus, Ph.D., is associate professor and chair of the executive committee at the University of Wisconsin-Milwaukee’s Lubar School of Business.
