Know what’s really impressive about today’s boffo 3.5 percent GDP growth number for the fourth quarter? It wasn’t so long ago that Wall Street economists were wondering if the number would be a “one-handle”–meaning growth between 1.0 and 1.9 percent. And instead of a “hard or “soft” landing, investment pros are now talking about a “growth scare” where a surprisingly robust economy would push the Federal Reserve into raising interest rates.
In any event, I am starting to lend more personal credence to the theory that a combination of strong growth, fat corporate profits, and already tight labor market might push the unemployment rate to lows we have not seen since the 1960s. Here is MKM Partners economist Michael Darda:
Our indicators suggest that the outlook for the labor market is stronger than anytime since the late 1960s, when the unemployment rate dropped below 4 percent on a sustained basis. Weakness in profits and high real interest rates undermined the tight labor market of 1999–2000, whereas profits are much stronger today while real rates are much lower. In other words, monetary policy is much more accommodative now than it was before the last recession, which put an end to the tightest labor markets in 40 years. In fact, the profit and productivity backdrop is stronger now than it was during the first 20 quarters of the 1961–1969 expansion. … We thus expect unemployment to drop below 4 percent during 2007. … It also would mean the bond market’s dovish fantasies for weak growth and Fed rate cuts would fade as the FOMC’s concerns over cost-push inflation intensify.
Me: If only Bush wasn’t president!