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Are happy days here again for the economy?

Just before Christmas Day, the Bureau of Economic Analysis updated its estimate of growth to 5 percent for 2014's third quarter, and it also revised second-quarter growth to 4.6 percent. Those very strong readings are a welcome acceleration over the very slow recovery from the Great Recession, and they've led many people to ask if happy days are here again.

Perhaps, but we have reasons to be wary as well. First, as Dean Baker of the Center for Economic Progress points out, these robust growth rates follow the first quarter's -2.1 percent flop. That fall has been widely blamed on bad weather.

Said Baker: "This is surely true, but the strong growth in the subsequent two quarters is clearly related to the drop in the first quarter. The growth in these quarters was a reversal of the decline in the first quarter. If we take the average growth over the last three quarters, we get a 2.5 percent annual growth rate. This isn't bad, but it's hardly anything to write home about."

Thus, while growth was very strong in the second and third quarters, and is likely to be above average in the near future, we shouldn't expect GDP to continue expanding at the same pace as it has recently.

Second, as Dean Baker also noted, some special factors increased growth in the third quarter that are unlikely to persist. Strong military spending, a smaller trade deficit and investment in equipment contributed approximately 2 percent to the growth rate, but all of these are likely to add much less in the fourth quarter, or even be reversed.

According to Baker, "Military spending is highly erratic and sharp jumps are almost always followed by sharp falloffs in subsequent quarters ... October's deficit was considerably larger than the third quarter average, which means that the trade deficit will be subtracting from growth in the fourth quarter. Equipment investment ... is also likely to go the other way in the fourth quarter. The data for October and November show that shipments are running below the third quarter average ..."

Third, the economy is likely to hit unexpected bumps in the road. Just as unforeseen positive developments can increase growth to the high levels we saw in the second and third quarters, unforeseen negative developments can drag the rate downward. Quarter-to-quarter growth rates can be highly variable, and we should expect periods with low growth in the future.

Nevertheless, we also have reasons for tempered optimism. Personal consumption expenditures were strong in November, and indications are that metric will be strong again for the fourth quarter. Forecasts of motor vehicle sales are also very high. So, taken together, these indicators point to relatively robust fourth-quarter economic growth, but perhaps not as high as in the previous two quarters.

The message for monetary policymakers is straightforward. Economic conditions are improving, but it's too soon to declare victory. It's easier to slow down an overheated economy than it is to stimulate one that's struggling, and removing economic stimulus too soon is a bigger error than removing it too late.

The Fed appears to understand that patience is in order. After all, it has been wrong about "green shoots" too many times already and seems to have learned its lesson.

Congressional policymakers, however, mostly haven't shown they understand the need for patience, and a big cut in the federal budget deficit could slow the economic recovery. But with any luck, gridlock will prevent the deficit hawks from getting their way before the nation's rebound is complete.

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