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An economy that won't wear out

US growth is roaring at 4.8 percent, but continued low inflation rates contain come concerns about overheating.

If economists gave out awards, the 1990s would go down as one of the best decades of all time.

The economy has ignored the business cycle and continues to grow and grow. Inflation, the bane of Federal Reserve bosses, appears tamed. And the financial markets are rewarding investors with handsome returns.

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This picture of an economic nirvana - an era even better than the postwar 1950s - now looks as if it will continue into the next millennium. Yesterday, the government reported the third-quarter gross domestic product (GDP) thundered ahead at a 4.8 percent annual rate - a pace fast enough to cause concern about an overheated economy. But the report showed inflation for the quarter dropped to a 1.6 percent annual rate, reducing some of the anxieties.

With this momentum, the economy heads into 2000 in championship mode. "This is the expansion of the century," says Brian Fabbri, chief economist at Paribas Capital Markets in New York.

Despite this good economic news, most economists still expect Federal Reserve Chairman Alan Greenspan will want to hike interest rates next month. The economy is far stronger than Mr. Greenspan feels comfortable with, and the stock and bond markets are expecting the Fed to raise rates. In fact, yesterday the Dow roared 200 points higher by midday as investors were cheered by the economic news - especially a government report that showed labor costs rose by 0.8 percent, less than expected.

"There are rumors that the Fed is behind the curve on inflation, and that is a situation where the Fed can lose credibility if it does not respond," says Lyle Gramely, a former Fed governor, now a consulting economist at the Mortgage Bankers Association.

Behind the latest economic surge is robust consumer spending. Businesses, confident that consumers will keep buying, increased stockpiles in advance of the holiday season. This inventory accumulation added 0.7 percent to the GDP numbers.

"This economy is just a growth machine," says Stan Shipley, an economist with Merrill Lynch & Co. in New York.

With the world economy starting to pick up, US exports also rose - climbing at a 12.4 percent annual rate after growing at only a 4 percent rate in the second quarter. But imports rose even more, up 17.2 percent. The net effect was a reduction of about one percentage point in economic growth.

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If the Fed raises rates, it would be the third rate hike this year. The first two increases have already had an impact on the housing market. Thirty-year fixed-rate mortgages are now above 8 percent compared with 6.5 percent early in the year. As a result, housing starts are down slightly.

"Existing-home sales have declined for three consecutive months, but we are still at very healthy levels," says Brian Carey, an economist at the Mortgage Bankers Association.

Despite the dip in housing, most of the rest of the economic news is positive. Take business investment, for example. Companies are heavily investing in new technology. Some of the spending is related to the need to update computers for the year 2000. But some of it is simply corporations expanding to stay current.

Although business spending for the quarter was up about 5 percent, it slowed slightly in September. On Wednesday, the government reported durable-goods orders fell 1.3 percent, mainly because of a drop-off in sales of airplanes and autos. But orders for electronic equipment rose 0.4 percent for the month and the quarter; computer orders were up 11 percent.

"Business investment remains vigorous," says William Sullivan, an economist with Morgan Stanley Dean Witter in New York.

Consumer spending remains vibrant as well. Merrill Lynch estimates retail sales are rising at a 4 to 5 percent rate. Higher interest rates have yet to keep consumers from using charge cards.

In addition, consumers appear to be managing their credit-card debt better. Last month, the American Bankers Association reported delinquencies hit a four-year low as more consumers made their monthly payments on time. At the same time, bank write-downs of bad credit-card debt fell 265 percent compared with last year.

Consumers' improved financial condition is mainly related to the strong economy. The unemployment rate is just above 4 percent. And the October jobless rate, reported next month, is also expected to remain low.

This vibrancy is coming after eight years of positive economic statistics. Economist Michael Boldin of, a Web site that focuses on the economy, says the economy shows no signs of tiring. "It's hard to think we might have another eight years, but there's no reason to expect a recession," he says. "Even if the Fed raises rates another 0.25 of a percent, there's no reason to think we're showing our last legs."

(c) Copyright 1999. The Christian Science Publishing Society

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