IT ISN’T EASY to know where you are going when you don’t even know where you have been. That’s the problem facing economists as they try to guess where the American economy is headed.

A month ago the government reported that growth in productivity in the fourth quarter had plummeted to the puny rate of 0.8%. But last week the government revised the puny 0.8% to a more robust 2.1%. This means that unit labour costs, originally estimated to be rising at the inflation-threatening rate of 2.3%, had really risen at the less scary rate of 1.3%.

These new figures, along with the announcement that average hourly wages in America have risen only moderately, gave Alan Greenspan, chairman of the Federal Reserve Board, support for his programme of “measured” increases in interest rates, and forced his more hawkish critics to the sidelines.

But not for long. No sooner had the reassuring productivity data become available, than predictions of a quiet period in the oil markets were shredded by a confrontation with reality: prices soared above $55 a barrel, putting them more than one-third higher than at the end of last year.

Worse still, Adnan Shihab-Eldin, the acting secretary- general of the Organisation of Petroleum Exporting Countries (Opec), warned that supply interruptions might drive prices up to $80.

Now, we know several things about oil markets. One is that the Opec cartel does not have sufficient excess capacity to cope with short-term spurts in demand such as we are now experiencing as a result of the cold snap that is gripping the northeast of the United States and parts of Europe. Saudi Arabia says it is stepping up drilling for new reserves, but it will be some time before that capacity comes on line.

We also know that Opec’s policy of adjusting its output to prevent inventory build-ups in consuming countries will prevent the build-up of stocks that might provide a buffer against price spikes, and that the cartel has abandoned its old price target of about $25-$30 in favour of one in the $40-$50 range.

Finally, we know that oil prices affect the rate at which the American and world economies can grow. Studies suggest that every $10 increase in the price of oil cuts economic growth by between 0.3 and 0.4 percentage points. With the American economy growing at an annual rate of some 4%-4.5%, even a sustained rise in oil prices to, say $60 a barrel, would not slow it down to anything like the snail’s pace at which Europe’s main economies are expected to grow, unless policymakers repeat the mistakes made during earlier supply crises.

But we do not know whether the recent price spurt was due merely to temporary factors such as the cold spell and fires in three American refineries that drove up petrol prices; the extent to which speculative buying is adding to price pressures; whether Opec will decide at its next meeting in two weeks to stick to its plans to cut output even if prices remain high; how long it will take the Saudis to ramp up capacity; or at what cost refineries that now can operate only on scarce high-quality, “light” crude can be adapted to process the cheaper, more abundant, “heavy” crude.

Unless something worse than now seems likely happens in oil markets, or some new terrorist attack materialises, the American economy seems to be heading for a good year.

The National Retail Federation reported last week that “strong sales and traffic last month have brightened the retail picture” after four straight months of decline. It also said retailers are predicting that consumers will be “heading to the stores in larger numbers” in the spring. And from the Institute of Supply Management comes the cheering news that both the manufacturing and non-manufacturing sectors continued to grow in February.

Meanwhile, the housing market goes from strength to strength. Despite bad weather in parts of the country, housing starts rose in January by 4.7%. Applications for building permits also rose, suggesting that building activity will continue to race ahead.

And the latest figures show that the employment market is improving. The economy added 262,000 new jobs in February, bringing the new non-farm job total for the past 12 months to 2.4m.

All this may be good news to workers, consumers, and the White House. But it is grist for the mill of Greenspan’s critics, who want him to raise interest rates faster. They point out that in February the Fed’s favourite measure of inflation recorded its largest increase in more than two years, and that house prices have risen by double digits in the past year. The word “bubble” is once again on their lips.

Nor do revisions in productivity and labour-cost data impress these inflation hawks. Although the revised productivity and labour-cost data are less threatening than the numbers that were produced earlier, both compare unfavourably with earlier periods. The 2.1% growth rate in productivity finally recorded for the fourth quarter of 2004 is well below the 4.4% at which output per worker improved in 2003, or the full-year 2004 figure of 4%. And the 1.3% rise in unit labour costs was well above the increases recorded in 2003 and earlier in 2004.

With housing starts at the highest level in 20 years; the manufacturing and non-manufacturing sectors expanding; no sign that the federal budget is being brought under control; and the weakening dollar threatening to increase the price of imports and reduce the competitive pressure on domestic manufacturers to keep prices down, the hawks may have a point.

But my guess is that Greenspan will sensibly continue the “measured pace” at which he is raising rates until he believes that the market is signalling that he has found the holy grail of the “neutral” interest rate, the one that neither stimulates nor slows the economy.

Irwin Stelzer is a business adviser and director of economic policy studies at the Hudson Institute

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