IS IT AN EARTHQUAKE or simply a shock, asked Cole Porter almost 70 years ago. That question, or one almost like it, is puzzling economists today, as they try to decide whether the U.S. economy has merely hit a speed bump in the road to continued recovery, or driven into a ditch. The nervous types worry that high oil prices will scare consumers out of the malls, that a house-price bubble is about to burst, that the Chinese economy is about to implode, and that America's huge trade deficit will cause a massive sell-off of the dollar, forcing the Federal Reserve Board's monetary policy committee to raise interest rates to recession-causing levels. Not to mention the possibility of a terror attack. There's more, but you get the idea.

The easy answer is that there always have been, and always will be, risks out there. As Steve Friedman, director of the president's National Economic Council, put it last week, "There's never been a perfect economy." But the U.S. economy somehow manages to move ahead. After all, the traumatic shock of the attack on 9/11 wore off long before anyone had reason to believe it would, even though the assault hit the economy when it was just beginning to recover from the bursting of the bubble and a recession.

Nevertheless, the pessimists are not paranoid: there are real facts that are worrying--until you examine them closely. The economy added only 96,000 jobs in September, well below expectations of 145,000, but it did add 1.6 million new jobs this year, and the 5.4 percent unemployment rate is the lowest since October 2001. Consumer confidence is at its lowest level since May, but it is still above the low point of early 2003, and consistent with an entirely satisfactory 3.0 percent to 3.5 percent increase in consumer spending. Durable goods orders fell in August, but if we exclude highly volatile aircraft and other transport equipment sales, new orders rose by 2.3 percent. Oil prices hit and passed the $50 per barrel mark, but only 3 percent of the average household budget is now spent on energy products, half the level during the 1979-1980 oil shock.

SO MUCH FOR THE PAST. The more interesting question is what lies ahead. Start with the dollar. Several key Federal Reserve Board officials warned last week that the current trade deficit, seemingly headed towards 6 percent of GDP, means that the dollar is headed for a decline, creating future inflationary pressures. Cynics are saying that is part of a Fed effort to justify a continuation of its program of ratcheting interest rates up, even though last Friday's job report was so disappointing. After all, so long as China and Japan pursue export-led growth by refusing to let the dollar fall against their own currencies, the greenback will avoid a massive decline.

Next, look at the prospects for growth. There is general agreement about two things: Oil prices will stay high, at least for awhile. Production in the U.S. Gulf will take a month to recover from the ravages of the hurricanes that hit the area, China's appetite for fuel shows no sign of abating, Putin remains intent on destroying Russia's most efficient oil producer, and insurgents continue to threaten production in Iraq and Nigeria.

The second consensus view is that consumer spending will grow at an annual rate at or in excess of the satisfactory rate of 3.0 percent. The unemployment rate is low, average hourly earnings rose by 2.4 percent in the past 12 months, personal incomes are up, and consumers' total net worth rose sharply in the past year, with stocks and mutual funds rising in value by $1.4 trillion. If the rule holds that every dollar by which wealth increases results in somewhere between three and five cents of spending, consumers should continue to keep credit cards swiping even though tax refunds are no longer arriving in their mail boxes.

It is the business sector that has the experts at odds with one another. Optimists argue that corporations are awash in cash and their balance sheets are strong. Business spending is rising. Computers and other high-tech goods overdue for retirement are finally being replaced, demand for longer-lived capital equipment is rising, and business construction of buildings and the like is up almost 6 percent from last year. Two interesting indicators--global chip sales and global air cargo shipments--are both soaring. The former rose 34 percent in the past year, and the latter by 14 percent so far this year.

Add to that, argue economists at BusinessWeek, the fact that low inventories presage an increase in orders so that shelves can be re-stocked. Wrong, say economists at Goldman Sachs. "The U.S. inventory cycle is about to turn. . . . Inventory investment is about to become at least a modest growth drag . . . slowing [factory output] to about 2 percent growth over the next year from 6 percent over the past year."

Which is why Alan Greenspan, who has to decide who is right, gets paid the big bucks, to use a Wall Street expression that is completely inapplicable in the case of the very modestly remunerated Fed chairman (not counting psychic income). He has to decide whether to continue raising interest rates--a good idea if we have only hit a speed bump--or stop raising rates--a necessary policy reversal if a period of stunted growth is ahead.

My own guess is that Greenspan is a member of the temporary "shock" rather than the "earthquake" school, will continue raising rates, and will be vindicated when the growth rates for the balance of this year and next are tallied. Before that, however, America will have elected a president, a far more consequential decision than whether interest rates should be raised.

Irwin M. Stelzer is director of economic policy studies at the Hudson Institute, a columnist for the Sunday Times (London), a contributing editor to The Weekly Standard, and a contributing writer to The Daily Standard.

Next Page