The US economic boom is here to stay

A cut in defence spending contributed to slower-than-expected fourth quarter growth in the US economy. Photo / Getty

On Friday, the US government announced that the economy grew at a slower-than-expected 2.6 per cent annual pace in the fourth quarter of 2014, but don't throw yourself into a pit of despair. The boom is still very much alive.

The bad news can be summed up in eight words: more imports, fewer exports, and less defence spending. The economy, in other words, had a bigger trade deficit and a smaller government deficit. The first half of that had to do with a stronger dollar.

The simple story is that the stronger the economy, the stronger the currency. The slightly more complicated version is that currencies go up when monetary policy is tight, and down when it's loose. That can be trickier than it sounds, though, because policy can be tight even when rates are zero, like Japan a few years ago, if the economy needs even more help than that.

So now that the US economy is picking up enough that markets expect rates to start rising later this year, and the rest of the world is either slowing down or still stuck in a slump that's made them cut rates or print money, the dollar has shot up 10 per cent against a broad index of currencies the past 12 months.

That's made imports cheaper for us, and our exports more expensive for everybody else, both of which have hurt our GDP. It didn't help that the Pentagon cut defence spending, as it usually does in the fourth quarter, by 12.5 per cent. Altogether, these took 1.6 percentage points off growth.

There was still plenty of good news, though, none bigger than cheap oil. Consumer spending exploded to make up 2.87 of the economy's 2.6 percentage points of growth in the fourth quarter. (Everything else combined to subtract from it).

That's the kind of spending that would would normally evoke words like "unsustainable," but not as much when lower prices at the pump are putting more money in people's pockets. And if the last few months are any indication, it could make the economy's already-virtuous circle even more so, as more spending leads to more jobs, which, in turn, leads to even more spending, and so on, and so on.

That's why, at some point soon, newly employed twentysomethings should start moving out of their parents' basements, enough that we'll have to start building again - and residential investment will start adding more than the meager 0.13 percentage points to growth that it just did. The boom, in other words, still has plenty of room to grow.

Now wait. I keep using this word "boom," and you do not think it means what I think it means. Well, by the sad standards of this slow and steady recovery, it only takes something like 3 per cent annual growth to qualify. That's because the economy hasn't been able to do much more than chug along at a 2 per cent pace the past few years.

Sure, it's grown more when companies have had to restock or sold more overseas, but that's not something you can count on every quarter. That's why the better way to tell the economy's underlying strength is to strip out the volatile inventory and net export numbers, and only look at consumer spending, government spending and private investment - and over a year, not a quarter, to smooth out any weird weather effects, like last year's polar vortex-induced slump.

This goes by the catchy name of final sales to domestic purchasers, and it shows us how much of today's growth we can expect to continue tomorrow. The surprising answer is that, even though annual GDP growth slowed from 2.7 per cent in the third quarter to 2.5 per cent in the fourth, this "core" growth actually ticked up from 2.7 to 2.8 per cent. And that is the best it's been during the whole recovery.

So lower unemployment, lower household debt and more consumer spending - not to mention an end to austerity and what figure to be still-low interest rates - should power the economy for awhile longer. The only negative is there might not be anything fluky about our trade deficit if the dollar keeps going up, which is just another reason why raising rates too soon or too fast would be a classic blunder.

This is a boom, not a blip. But you might want to whisper that for now.