Just three months ago, it looked as if we were goners.

Hurricane Katrina had effectively knocked out refinery operations along the Gulf Coast and pump prices suddenly soared to well over $3 a gallon. The price of oil briefly topped $70 a barrel, not just in response to Katrina but to demand from China, delivery problems out of Iraq and growing political tensions with Iran. Five dollar gas seemed to be just around the corner.

In another era, it could have been the makings of an energy crisis and with it, perhaps, a recession.

So what happened? Amazingly, not much.

Even though more than 20 percent of oil and gas production along the Gulf Coast is still shut off, pump prices have fallen sharply over the past two months (although still higher than year-ago levels), third-quarter gross domestic product grew at an unexpectedly robust 4.3 percent annual rate, and the economy added 215,000 jobs in November, the biggest year-over-year increase in more than two years.

The GDP numbers, in particular, are “well above trend and an indication of very strong economic growth,” said Federal Reserve Board Gov. Mark Olson.

Again and again, the economy has shown a remarkable ability to roll with the punches, and this fall’s energy spike is only the most recent example. There’s been China, of course, but also the fall of GM, the surging federal budget deficit and overvalued home prices. Any one of these could have been the makings of flat growth or worse and yet, as 2006 approaches, the outlook is mostly positive.

A survey by Wells Fargo Economics finds that 54 percent of L.A. County businesses see current and future economic conditions improving and that nearly a third expected improved or much improved conditions for hiring over the next year (only 12 percent expect hiring conditions to worsen). “Southern California businesses we’ve surveyed say they believe that current business conditions are robust and the future looks just as good,” said Wells Fargo Senior Economist Scott Anderson.

‘This massive thing’


But how could this be? How is it that the clunky but predictable business cycle where an extended period of growth is interrupted by a contraction of two or more quarters, followed by recovery has been replaced by a kind of economy that picks up or slows down but doesn’t actually decline? It’s been almost 15 years, after all, since the GDP has contracted for consecutive quarters, and there is little to suggest that pattern changing in the coming year.

“The economy is this massive thing, not easily knocked off track,” Claymore Securities economist Brian Wesbury told the Christian Science Monitor. “This economy has tremendous momentum.”

The force of that momentum can be seen in a recent Federal Reserve report showing U.S. households with a combined net worth of $51.1 trillion in the third quarter, a record high. It’s easy to figure out why: household assets, including homes, equities and retirement funds, are increasing faster than household debts.

Luck has certainly played a role. It’s no coincidence that growth has occurred in the four-plus years since terrorists struck the United States. Recent polls show that Americans have woefully limited memories; they place bread and butter issues like jobs and health care ahead of terrorist concerns. (Only 12 percent of Americans say they’ve done a great deal to prepare for a natural disaster, terrorist attack or other major emergency, according to a survey conducted for the American Red Cross.)

Beyond luck is an economy of selective inclusion. New York Times business columnist Floyd Norris notes that when looking at job creation, the period after the end of the 2001 downturn has been the slowest since World War II. The number of jobs is up only 2.6 percent, besting the previous low of 4 percent during the 1953-54 downturn.

In L.A. County, the problem is not the number of jobs; October’s jobless rate was 4.5 percent, the lowest since the state changed its data collection methodology in 1990. It’s the types of jobs being created disproportionately the low-wage and dead-end variety.

Shifting demographics and industries have widened the divide between the skilled and unskilled workforces. Evidence of this can be seen in the growing informal economy, the cash-only sector that covers everyone from day laborers to contract workers, which is estimated to make up 16 percent of all jobs in the city of L.A.

“One could argue that jobs in the informal economy are better than no jobs at all,” concluded a newly released report by the Milken Institute on the Los Angeles economy. “Note, however, that the informal economy sometimes competes with the formal economy, driving down wages and reinforcing social and economic polarization.”

Here’s to efficiency


Even with these concerns, it’s hard to ignore crowded malls, new car sales and home purchases. Growth has been so consistent and sustained that some analysts are even uttering that most jinxed phrase in economics “it’s different this time” because it really is.

What’s mostly different is the nation’s efficiency. This is hard to see on a day-to-day basis, but technology has largely taken the guesswork out of inventory levels, worker productivity and consumer spending. Supermarket chains know at a glance that a particular item is not selling well, allowing them to reduce new orders. Airlines can instantly determine the price elasticity of their flights and make the appropriate adjustments in fare structure.

All this provides the Federal Reserve with a more reliable set of tools for measuring growth, fighting inflation and setting interest rates. With that comes a financial system that some say has helped spur the real estate boom.

Another difference: the increased dominance of the service sector. Nowhere is this shift more prominent than in Los Angeles, where manufacturing has been downsized and is now dominated by the low-paying apparel business instead of the highly skilled aerospace industry. Meanwhile, service jobs continue to grow, and while there is little opportunity for moving up the ladder, they at least provide stability. After all, you can’t outsource waiters and store clerks.

Then there’s the ever-reliable American consumer, who has a remarkable, if misguided, capacity to ignore what could happen in life and concentrate on the here and now. That might explain why the 2001 recession turned out to be so shallow and why consumer spending remains the lifeblood of economic growth. Of course, it’s also resulted in a greater accumulation of household debt; “buy now, pay later” has been a decades-long mantra of American consumerism.

Yes, this time it is different. And although the safeguards put in place hardly assure economic nirvana, they do help eliminate a lot of guesswork and with it, vulnerability to the extreme highs and lows. It makes for a very forgiving economy that can withstand any number of storms and meltdowns.

But how many? And what kind? Even in these relatively stable times, those questions keep some of us awake at night a point underscored by the 9/11 commission’s sobering report on how the nation remains unprepared for a terrorist attack. “More than four years after 9/11 … people are not paying attention,” said former commission chairman Thomas Kean, a Republican and former governor of New Jersey. “God help us if we have another attack.”

It makes the run-up in home prices seem like child’s play.

*Mark Lacter is editor of the Business Journal. He can be heard every Tuesday morning at 6:55 and 9:55 on KPCC-FM (89.3).