THE (STILL) COMING SLOWDOWN

DESPITE MANY WARNING SIGNALS, THE U.S. economy has not yet slowed down. Not at all. Over the most recent four quarters, inflation-adjusted GDP has risen 3.7%, precisely the same amount it rose over the previous four quarters. There has been no deceleration despite higher interest rates, higher inflation,

Obviously, the old rules do not apply any longer. In the past, a one-percentage-point increase in the federal funds rate, the interest banks charge each other on overnight loans, would reduce real growth by about half a percent. Yet the recent increase in the funds rate from 1% to 5% over 23 months has not put even a minor dent in the growth rate. Yes, I realize the economy will probably grow less for the rest of 2006, but even if inflation-adjusted growth falls to a 3% annual rate-a likely, but not foregone, conclusion-the old rule of thumb would still be invalidated. Specifically, both capital spending and exports have been stronger than was anticipated a year ago.