Is It Really Morning in America?

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President Obama has a reason to smile.Photo: Getty Images

Of late, the economy has hit a few nice, round numbers. The Dow Jones topped 18,000. The price of gasoline dropped below $2 a gallon in some parts of the country. Update: Gallup’s closely watched economic confidence index turned positive, hitting its highest level since the beginning of the Great Recession. And the pace of economic growth hit 5 percent.  

That last one — that’s a good number. It’s a very good number. And it is a good number that has come amid a streak of other good numbers, dimming the chance it is just a onetime fluke. But we’ve been fooled by bursts of growth a few times since the financial crisis. How do we know that the recovery is really picking up this time?

Let’s start by trying to tear that 5 percent growth number apart. Let’s cast it in as negative a light as possible.

1. First off, stagnant wages are undercutting any sunny forecasts. The economy might be growing strongly, and unemployment has dropped steeply. But most Americans do not get a sense that things are really getting better because their incomes are still flatlining. The median income has fallen through the recovery, and wages have just barely kept pace with inflation. As such, average families are not really living on more than they used to, and rising spending on health care, child care, housing, and education have squeezed their overall standard of living. Some recovery this is.

2. Yawning inequality is a related issue. Yes, the stock market has gone on an extraordinary tear and total economic output has grown. But those gains have failed to translate into better lives or earnings for the middle class. The pie has gotten bigger, but the slices have remained the same for the 99 percent. It’s only the one percent getting fat.

3. Next, there’s the catch-up argument. Sure, the economy might be growing at a decent-enough clip now. But that growth comes after years of sluggishness, preceded by a brutal recession, preceded by more years of sluggishness. For the economy to snap back to its potential, it would take years of growth at this kind of pace.

4. Dark clouds are looming again. The United States is the only advanced economy showing some real verve at the moment. The Eurozone crisis is flaring — improbably — again. Japan has tried, and failed, to revive its flagging economy. On top of that, China has slowed. Eastern Europe has faltered. Latin America has slumped. “Increasing potential output, let alone potential growth, is a tall order, and expectations should remain realistic,” wrote Olivier Blanchard, the International Monetary Fund’s chief economist, in a dour note this fall. “The challenge for policymakers is to reestablish confidence by articulating a clear plan to deal with both the legacies of the crisis and the challenges of low potential growth.” All of the United States’s major trading partners are facing strong headwinds — and driving up the value of the dollar, signaling trouble for American exports.

5. There is also the Janet Yellen question. For years, the predominant factor driving the recovery — particularly the recovery in the value of financial assets, like stocks — has been the Federal Reserve’s easy-money policy. Short-term interest rates are at scratch, and on top of that, the Fed has been soaking up hundreds of billions of dollars of assets to bring down longer-term borrowing costs. The whole system is awash in liquidity. But that’s coming to an end. The Fed has stopped purchasing new assets and looks set to raise interest rates next year. A rise in borrowing costs would cool the economy off, and a sharp rise in borrowing costs might result in a wave of defaults and foreclosures.

6. Finally, there’s the historical argument. For the past few years, year after year, economists have promised that stronger growth is just around the corner. Somehow, that stronger growth has never materialized. They’ve blamed the world economy. They’ve blamed the weather. They’ve blamed Congressional intransigence, sequestration, the debt ceiling, the Affordable Care Act. One way or another, good growth has never stuck around. 

Add all of those factors together and that 5 percent growth does not look so good. It looks fragile. It looks insufficient. It looks illusory. But that’s ignoring the upside — an upside I’m convinced finally outweighs the downside, signaling a real uptick in the state of the economy.

(a) Gas is cheap. Yes, Houston might have a problem. North Dakota might, too. But for states and cities that are not so reliant on energy production — meaning most of them — those plummeting gas prices are a very, very good thing. They are a direct cash stimulus, helping the poorest and most insecure households, amping up consumer spending, and lifting consumer sentiment. That means more money spent on houses, cars, and household goods. It means more meals out, more impulse purchases, and bigger birthday presents. It means the American consumer, browbeaten and pinched, might finally be back.

(b) There are signs of wage growth — finally. Unemployment seems to have dropped low enough to nudge employers to pay their workers more. One major employment-cost index, for instance, has headed upward, and last month, average hourly earnings jumped 0.4 percent, the most since last summer. That, again, means more consumer spending, pushing the economy into a more virtuous cycle of growth. And more important, even if wage growth proves lackluster, those falling gas prices should help families feel richer and free up cash in their pocketbooks in the coming months. 

(c) The economy may already be prepared for external risks. The Fed has telegraphed its plans to hike rates for a very long time, allowing the market to account for the change in policy. The fact that Europe might be fraying and that emerging-market economies are slowing down has also been readily apparent, giving businesses time to ring-fence, hedge, guard, and plan. The big risks seem to be known risks, meaning that they might pose less of a threat.

(d) That 5 percent number is really strong. It’s just a quarterly growth reading. But it signals billions of dollars of additional economic activity next year.

Economy-watchers have been wrong to predict recovery so many times before. But at least right now it looks like we are headed into a very happy new year indeed.