Goldilocks' economic growth is just right

By By DARYL DELANO, Delano Data Insights -- Modern Materials Handling, 12/1/2000

The Goldilocks U.S. economy was alive and well as we moved into the final months of this year. Not too hot, not too cold-about as close to just right as we're likely to get.

Growth in real (inflation-adjusted) Gross Domestic Product (GDP) slowed to an annual rate of 2.7% during the third quarter, according to preliminary estimates from the U.S. Commerce Department. GDP gains during the previous four quarters had averaged a much more robust 6.1%.

And the Labor Department reported that the increase in total employer compensation costs increased at the slowest rate in a year during the third quarter of 2000. So the tight labor market that has persisted for the better part of 3 years has yet to push wages dramatically higher-although the annual rate of increase this year has been higher than most would prefer.

These reports should quell fears in the economic-policy-making community that an outbreak of generalized price and wage inflation is inevitable. In other words, the porridge isn't too hot but it remains plenty warm. And it's been a while since we've had concerns about it being too cold.

The third-quarter GDP slowdown came about largely because inventory investment, which had been very strong during the first half of this year, didn't grow at all from the very healthy pace of the prior quarter. Business investment in equipment and building continued to grow during July-Sept. However, it did so at only about half the 14.6% annualized rate recorded during this year's second quarter.

On the other hand, consumer spending growth accelerated during the July-Sept. period, but remained lower than the 1998 and 1999 averages. And exports increased at their strongest annualized rate since the second quarter of 1997.

The Labor Department's third quarter Employment Cost Index (ECI) report showed a rise of 0.9% from the previous quarter-the slowest rate of increase in the overall ECI in a year. While benefit costs moved up during July-Sept. at a faster rate than wage rates for the fourth consecutive quarter, wages/salaries grew at their slowest rate since the first quarter of 1999.

Nevertheless, there's no escaping the fact that companies are paying more for labor these days because of the persistent labor or, at least, skill shortage. Between Sept. 1999 and Sept. 2000 the ECI increased by a cumulative 4.3%. This was an annual rate of wage/benefit inflation well above that for any comparable period during the past 8 years.

On balance, the economy remained in good shape as we entered the final quarter of 2000. Overall inflation was still surprisingly well-behaved given the level of demand in the economy and the degree of tightness in the labor market. And U.S. economic growth continued solidly positive-but not at such a high level that the Fed would feel compelled to raise interest rates again in the foreseeable future.