A happy new year

EIGHT out of ten voters told exit pollsters in November that they were worried about the economy. That is one reason why the new Congress, which starts sitting next week, is dominated by Republicans. Yet there is mounting evidence that the benefits of the economic recovery—long concentrated among the rich—are spreading to ordinary Americans.

On December 23rd GDP growth for the third quarter was revised up to 5%—its fastest pace since 2003—having grown by a nearly-as-impressive 4.6% in the second quarter (see chart). To be sure, America is making up for ground lost in the first quarter, when GDP actually shrank because the weather was awful and companies cut inventories. For the past 12 months GDP is up 2.7%: respectable but not amazing. Forecasters surveyed by The Economist think America will grow 3% next year.

Economists have projected similar growth rates since the recovery began, only to be disappointed. Growth has averaged just 2.3% since the recovery began in July 2009. But this time they have hard evidence on their side. Some 321,000 jobs were created in November, compared with a monthly average of 194,000 during 2013. Despite this, inflation has fallen. The Federal Reserve can thus continue to keep monetary policy unusually loose, and asset prices are soaring. The Dow Jones Industrial Average passed 18,000 for the first time shortly before Christmas.

Consumer sentiment has grown jollier in recent months—as jolly as it has been since before the recession, according to the University of Michigan. For several reasons, the good mood is likely to last into 2015. One is the composition of recent growth: it is the result of solid household spending, the most important component of demand. It grew at a 3.2% annual rate in the third quarter, and may grow 4% or more in the current quarter, reckons Morgan Stanley, a bank.

Two powerful tailwinds are helping. The first is the big drop in the price of oil, from $110 per barrel in June to below $60. Cheaper petrol holds down inflation and leaves American consumers with more money to spend on other things. (Although America produces more oil and imports less of it than five years ago, it remains a net importer.) Saudi Arabia seems willing to tolerate even lower prices to protect its market share, so the boost may last.

The other, even stronger, tailwind is growing incomes. Job growth is accelerating, and there are signs, albeit faint, of an uptick in wages. America’s underlying potential growth rate has slipped in recent years, from 3% or more a decade ago to around 2%, thanks to a slower-growing workforce and lacklustre productivity. So any growth rate above 2% helps to use up spare capacity. Labour market data confirm this: non-farm employment grew faster in 2014 than in any year since the 1990s, and unemployment has fallen to 5.8%. On current trends, it could drop close to 5% within a year, less than many estimates of the natural rate of unemployment (at which a labour shortage puts upward pressure on wages and prices).

The median household’s real income is up 1.2% for the first 11 months of the year, according to Sentier Research, a private firm, a marked acceleration from the previous two years. That barely dents the 8% drop in median incomes between 2008 and 2011, but it does suggest that the expansion is finally reaching ordinary households.

The joy of feeling shale-shocked

Thanks to cheaper oil, the Federal Reserve now thinks inflation will end next year around 1.3%, according to projections released on December 17th, and will not return to 2%, its target, before 2018. As a result, rates could either rise later, or more slowly, than currently expected. The Fed promises to be “patient” about tightening monetary policy. Janet Yellen, the Fed’s boss, told reporters that she would like to see unemployment fall below its long-run natural rate, in the hope that this might nudge wages and prices higher. A combination of robust underlying growth and a patient central bank is catnip to investors—hence the buoyant Dow. It is a cocktail reminiscent of 1998, when the Asian crisis sent both oil prices and bond yields down sharply, which goosed American growth and stock prices. What hurt the world helped America.

For the past six years Republicans in Congress have argued that America must cut public spending to bring dangerous deficits and alarming public debt under control. Now, the budget deficit has fallen below its average of the past 40 years (as a share of GDP) and perkier growth is making the national debt look more manageable. Republicans are still arguing for spending cuts, of course, but now they have to convince voters that smaller government is better.

It may seem obvious that a stronger economy would rob Republicans of one of their best arguments for change in the White House in 2016, and give Democrats a boost as they gear up for the election. But the political effects of a stronger economy are unpredictable. Plenty of candidates have lost despite, rather than because of, their party’s recent economic record.

Hitherto, an economy that has delivered soaring corporate profits but done little for median wages has fired up Democratic activists and tempted them to push for a populist platform in 2016. As the benefits of recovery finally start to spread, however, a campaign based on economic disillusion looks less like a winner.