Economy Keeps Rising From the Mat


Call it the Rocky Economy–as in Rocky Balboa. During 2006, the U.S. economy took a beating (a 38 percent rise in gasoline prices, 100 basis points in Fed rate hikes, the end of the housing bubble) and got knocked hard to the mat (gross domestic product growth fell from 5.6 percent in the first quarter to 2.0 in the third). But now it looks as if the Rocky Economy is back on its feet and throwing haymakers. (OK, a merciful end to the over-the-top cinematic boxing analogy.)

Just look at today's powerful retail sales numbers for December. They rose a better-than-expected 0.9 percent. "Core" retail sales–excluding autos, gasoline, and building materials–rose by the same amount. On a year-to-year basis, this measure of "core" sales has accelerated to 6.9 percent growth from 5.7 percent in October.

Now compare these robust numbers with the end of 2000, when the economy was headed toward recession. Economist Michael Darda at MKM Partners did just that this morning and found the core measure of sales was growing only at a 3.5 percent pace back then– half its current growth rate. Darda concludes "those expecting consumption to slow sharply on the back of weakness in housing look to have made a bad bet. We continue to expect a strong labor market to propel strong wage/income/spending growth going forward."

Sorry, hard landers.

And guess what? Consumers are spending because they are upbeat about the future. A new poll of American consumers by the Royal Bank of Canada found that they are "feeling much more optimistic about their economic future" than they were a year ago. RBC's index of consumer sentiment stands at 96.3, up from 78.2 a year ago.

No wonder more and more economists think the fourth-quarter GDP growth might reaccelerate to 3 percent. And as the econ team at Action Economist notes, "we have yet to see the January boost that may well come from gift cards and warm weather." Perhaps the only bad news here is that all this good news makes it more and more likely that the Federal Reserve won't see the need to cut rates anytime soon, one probable reason stocks were down early today.

"At this rate of growth, the Fed is going to get increasingly uncomfortable with market expectations of its next move being a rate cut rather than a rate hike," concludes Brian Wesbury of First Trust Advisors.

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