A Recovery That's Working

Bad news: The economy is booming.

Bad news, that is, for those who have continued to insist, in the face of mounting evidence to the contrary, that President Bush’s tax cuts (search) aren’t working. They’re running out of negative spin.

When the news came last month that economic growth in the third quarter of the year had surged to 7.2 percent, for example, they had a ready retort: It’s a “jobless recovery (search).”

Not any more. According to new figures from the Bureau of Labor Statistics, employment grew by 126,000 in October and by nearly as much in September. In related good news, unemployment fell slightly, from 6.1 percent in September to 6.0 percent in October.

Two months may not show a trend to some critics, but the revised September numbers -- taken with the October data -- strongly indicate a robust recovery in employment. Moreover, what the jobs report does show is how widespread the employment gains are. For instance, gains for women were among the strongest in a year.

What’s significant about these figures is their signal that the economy is not merely poised for recovery, but in the midst of it. Job growth is usually the last patch in the economic recovery quilt. These patches now all appear to be in place. With few exceptions, economic indicators (search) are up across the board.

Indeed, the stellar growth of last quarter outpaced the expectations of even the most optimistic forecasters. Three sources of growth in particular show why the recovery is structurally sound and why we can expect continued growth.

Business investment. It’s grown significantly in the last six months and at an especially good clip in the last three months, which means that a crucial part of the economy is picking up steam. Businesses don’t invest in equipment unless they plan on producing more -- and in order to do that, they need more people. This is a critical signal that businesses are more confident and that they believe they can increase their activities without undue risk.

Business activity. It’s on the rise for manufacturing as well as the service sectors. The service sectors (where growth has been strong) are especially important because they account for 80 percent of the economy. New orders and production are rising in both sectors.

Business productivity. Productivity grew 8.1 percent in the third quarter, more than twice the normal growth rate. But there is even more good news: Month after month, productivity gains are accompanied by signs of life on the employment side.

While consumer spending has done much to sustain the economy throughout the recovery, business investment, activity and productivity are what cause job growth, and these missing links now appear to be in place.

What about manufacturing jobs? Unfortunately, they continue to languish, falling in October by 24,000 jobs. However, this is nothing new. Manufacturing jobs (search) have been declining for a generation; but our economy has not come to the screeching halt some predicted. Instead, these jobs have been replaced by better-paying ones in the service sector, which includes everything from financial, banking, health and legal services to retail and construction.

This may not offer much comfort for those in manufacturing, but the fact is that our economy has evolved structurally just as it did between 1890 and 1920, when it moved from an agricultural economy to a manufacturing one. Jobs in this new framework are more knowledge-based, offer higher wages and provide more freedom to climb the ladder of economic prosperity.

One question remains: Why are we getting this good news now? Many factors are involved, of course, but critics cannot ignore the fact that the Bush tax cuts are working. They built a foundation for bringing the recovery full swing by providing incentives for businesses to expand and invest. Tax relief has lowered the cost of capital, made existing enterprises more profitable and investment and expansion more attractive.

As the economy continues to grow and expand, we can almost certainly expect to experience even stronger jumps in employment (especially if we make the tax cuts permanent). That may be bad news for those who earn their living by opposing tax cuts and other pro-growth strategies -- but it’s definitely good news for the rest of us.

Alison Fraser is director of the Roe Institute for Economic Policy Studies at  The Heritage Foundation, a Washington-based public policy institute.