It's The Economy, Stupid

This column was written by Irwin M. Stelzer.
The year that ended a few days ago was a pretty good one in America — unless you built GM or Ford cars, piloted Delta airplanes, or lived in the path of Katrina. And, sadly, unless you had a loved one killed or maimed in Iraq.

Most people got richer. Yes, share prices disappointed, but more people own houses than shares, and, with the exception of a few areas, house prices remained, to put it mildly, elevated. Corporate profits chalked up double-digit gains, continuing a three-year run of such increases. The jobs market strengthened to a point where just about anyone serious about finding a job could find one: economists at Goldman Sachs estimate that when the final tally for the year is in, over two million new jobs will have been created, and the unemployment rate, which began the year at 5.2 percent, will have fallen to 4.9 percent.

Despite a slowing in the last quarter, the economy racked up another respectable growth rate — around 3.5 percent, driven in part by a housing industry that built close to two million new homes for immigrants getting on the first rung of the housing ladder, Americans who decided that they can afford bigger homes with the now-requisite media centers, and baby boomers who are snapping up second homes in which to spend part of what will undoubtedly be their golden years.

Investment bankers returned to the glory days, closing almost $3 trillion worth of deals, putting revenues from these deals for each of the big four banks above the billion-dollar mark for the first time. And that doesn't include revenues from trading and other activities, all of which contribute to record bonus pools. Individual bonuses of six-, seven-, and in a few cases eight-figures are bringing smiles to the faces of high-end property salesmen, busy days in Porsche showrooms, and, less publicized, substantial increases in charitable giving.

Equally important, lots of bad things didn't happen. The dollar didn't collapse under the weight of a record trade deficit. House prices didn't collapse under the weight of rising interest rates. The economy didn't collapse under the weight of $70 oil and a hurricane that ravaged a large part of the nation's oil and transport infrastructure. And President George W. Bush did not appoint an incompetent to succeed the fabled Alan Greenspan as chairman of the Federal Reserve Board.

So much for the past. Is it prologue? Probably, but with a disclaimer. Economic forecasters were invented to make weather forecasters look good. Skilled analysts have trouble interpreting what has already happened, much less predicting what will happen. Consider this: on the day after the Federal Reserve Board's monetary policy committee met and raised interest rates last month, the Wall Street Journal headlined its story, "U.S. Fed raises rates, indicates more to come." The equally respected Financial Times captioned its report, "Fed signals end to rate tightening era."

So take the following with the appropriate pinches of salt.

Consumer confidence, buoyed by gasoline prices that have descended from $3 to close to $2 per gallon, has recovered to pre-Katrina levels. Although confidence levels are not the best predictor of consumer behavior, combined with a strong job market these data suggest that consumer spending might cool, but is unlikely to collapse.