U.S. economy actually OK

WASHINGTON ? Expectations that the Federal Reserve’s interest-rate hikes are nearing an end has re-energized Wall Street’s bull market — perhaps even Americans’ optimism about the economy.

Last week’s stock rally, fueled not only by news out of the Fed but also by new corporate earnings and profit reports, was further evidence the economy is operating on all cylinders, producing jobs in increasing numbers and finally earning the respect it deserves from financial markets.

There was also a palpable sigh of relief at the White House and among Republicans in Congress that this year’s continued rise in stocks may be just what is needed to repel the Democrats’ furious election-year offensive.

It is going to be much harder for Democratic candidates to argue the economy and the country are going to hell in a hand basket when businesses are reporting higher profits, jobs are in increasing supply and worker retirement plans are getting richer.

The economic news heading into last week, with the glaring exception of oil and gas prices, was pretty good to begin with.

The March job numbers were great, shrinking unemployment to 4.7 percent — lower than the average rate in the 1960s, 1970s, 1980s and 1990s. We’ve created over 5.1 million new jobs since August 2003, more than Europe and Japan combined.

Consumer confidence was climbing, with the Conference Board Index rising to 107.2 in March, its highest level in nearly four years.

Real disposable incomes were up 2.2 percent in the last 12 months. In fact, real per capita after-tax income has risen by 8.3 percent since 2001.

Inflation, that wearily worrisome boogeyman that frightens the Fed so much, has not been as scary as they feared. Core inflation, when volatile food and oil prices are excluded, rose by a tame 2.1 percent in the last 12 months.

But last week’s news out of the Fed, which cheered the stock markets, appeared to be a sign that they no longer feared inflation, or at least the core rate. Instead, they feared that their credit tightening could go too far in their efforts to cool the economy and sandbag it in the process, a concern raised in this column in February.

In a previous column, I quoted economic strategist Dave Smick, who heads an international consulting firm here, warning that, “If you wait until you see signs of weakness by raising rates, you will generally overshoot in the context of monetary policy because once the weakness appears you still have six months of the effects from tightening still to come out.”

This fear of overshooting was spelled out in the Fed meeting’s minutes, and it will be the chief reason when they decide to stop raising rates.

But what about oil prices? Won’t they worsen inflation? Perhaps, if the price keeps rising. But that did not happen last year when oil went to $50 a barrel, then to $60, then to $65. The economy seemed to absorb the price hikes without any serious impact on its growth, jobs or the core rate of inflation. I think that will be the case this year as well. There is nothing wrong with the price of oil and gas that new, aggressive exploration, drilling in the outer continental shelf and in Arctic National Wildlife Refuge, and a lot more gasoline refineries cannot cure.

The market place always responds to higher prices.

Donald Lambro is a syndicated columnist.