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Tuesday, May 18, 2004The US economy is in a sweet spot that should keep inflation at bay for some time.That's because the elongated start of the recovery means that the economy probably has a lot more room to run before it encounters a dangerous spurt in inflation. The key is productivity growth. It has been running at a remarkable 4.6% annual rate since the end of the recession and is the main reason the recovery has been so unusual. The economy appears to have entered a sweet spot in which rising corporate profits and increasing personal incomes should play off each other in a virtuous cycle of expanding activity. In the early stage of the recovery, when demand was sluggish, the benefits of productivity went largely to businesses, which saved money by cutting jobs. But now that the jobs market has finally turned up, workers have begun to share in the gains, which should make the recovery more sustainable. Because companies are getting more out of their workers, they can afford to pay them a bit more while still enjoying powerful profits. Recovery and growth confirmed from multiple perspectives. What effect this would have in the forthcoming election needs to be seen.
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