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Is it the Right Time to Raise Rates?

This story originally appeared on Chase Executive Connect.

Throughout the recovery, economic growth has failed to match historic patterns. GDP growth has averaged just 2.2 percent, roughly half the pace enjoyed in past recoveries. Sluggish growth would seem to indicate that the economy is still operating far below its potential, despite years of unprecedented support from the Fed.

But GDP growth should be viewed in context. Production is growing more slowly today than it has in the past, but this should not be surprising—due to retiring baby boomers, the American workforce is also expanding at a slower rate. With relatively fewer workers joining the labor force, the economy's underlying potential for growth has downshifted. The current rate of expansion may be low by historic standards, but it has been sufficient enough to recover most of the ground lost during the recession. The rapid decline of the unemployment rate should be a sign that slower GDP growth is not preventing the economy from operating near its full potential.

The Bigger Picture

There are also good reasons to suspect that the official measure of GDP is failing to capture new sources of growth. The methods used to estimate the value of computing power are likely producing underestimates, and the value of new online services has proven challenging to measure. Many disruptive startups, and large online retailers, have used investors' money to subsidize their operations, artificially deflating revenues. Falling gas prices have produced the misleading impression that sales are slumping at box stores. Taken together, these distortions are likely masking some of the economy's brightest spots.

Fortunately, there are reliable alternatives to GDP for gauging the economy's health, and these figures are overwhelmingly positive. Layoffs, the most comprehensive and current measure of economic stress, have fallen to an all-time low. If the nation's businesses were truly struggling, we would expect to see failing ventures produce a steady stream of layoffs. Instead, most employers are retaining their newly hired workers—a sign that strong demand is supporting new expansions.

The falling unemployment rate is the result of the economy adding jobs faster than the labor force has added workers, a sure sign of above-trend growth. Numerous other trends, from booming commercial construction to record automobile sales, support the claim that the recovery is more robust than GDP suggests. Stocks are rising in response to strong corporate earnings, and investors are optimistic about future growth. The gradual liftoff of interest rates is unlikely to derail the economy's current momentum.

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