In this economy, the 'R' word means resilient

Near-record energy prices. Hurricane devastation and displacement. Rising interest rates, with the Federal Reserve expected to raise its short-term rate to 4 percent Tuesday.

It all spells trouble for the US economy, right?

Possibly. Yet for years now, the world's largest economy has shown an impressive ability to absorb shocks and keep rolling ahead.

Among the latest signs are healthy boosts in consumer spending, worker incomes, and the nation's output of goods and services. That output, known as gross domestic product (GDP), expanded at a 3.8 percent annual pace in the third quarter, which includes the immediate aftermath of hurricanes Katrina and Rita, according to the government's preliminary estimate.

The number, stronger than analysts expected, suggests that the economy retains many of the strengths that helped America move through the dotcom bust, the 9/11 attacks, and corporate scandals like Enron with only a mild recession a few years ago.

The economy hasn't yet escaped cyclical swings entirely. But observers say the levers of finance and the gears of production have become better managed, more flexible, and less volatile. And for all its agility, the economy also benefits from gargantuan scale - with some $12 trillion in annual output.

"The US economy is this massive thing," not easily knocked off track, says Brian Wesbury, an economist at Claymore Securities in the Chicago area. Now in particular, he adds, "This economy has tremendous momentum."

Consider this: Last week's news marks the 10th straight quarter of 3 percent or greater growth in annual GDP. That's the longest such streak since the mid-1980s.

In the intervening years, business cycles seem to be getting smoother. The economy's slide in 2001 was so shallow that it has been almost 15 years since GDP has shrunk for consecutive quarters. And with the exception of 1991, you have to look back to 1982 to find a time when the economy was smaller at the end of the year than it was at the beginning.

Of course, an economy with smoother business cycles still endures hardship and challenges. Poverty has persisted even in an era of generally strong growth. Hurricanes this year and last have meant upheaval for millions of people.

Nor is there a guarantee of smooth sailing ahead. With the prospect of high heating bills this winter, consumer confidence as measured by the University of Michigan has plunged in the past two months to well below its 2001 valley.

A slowing housing market and higher interest rates are having an impact, too. Rising home values until now have buoyed consumers, providing a new source of wealth to tap. Meanwhile, low interest rates helped spur consumers to take a higher ratio of debt to income than in the past.

Now, as rates rise, some foresee a large brake on consumer spending.

Yet for all the challenges, economists generally don't see recession clouds on the horizon. Consumer spending rose 0.5 percent in September and incomes went up 1.7 percent, the biggest rise this year, the Commerce Department reported Monday.

"2006 looks like it's going to be a pretty good year," with about 3 percent growth, says Mark Vitner, an economist at Wachovia Corp., a bank based in Charlotte. N.C. "I think there's very little downside risk."

This year's final quarter, he warns, could see some slowing - to about 2.5 percent, he figures.

Many economists expect slower growth, but no decline, in consumer spending. Other components of GDP, such as exports, government spending, and business investment, are also moving higher.

"The biggest mistake of economists over the past 20 years" has been to be too pessimistic, Mr. Vitner says. "We've consistently underestimated growth."

What explains its vitality?

• The shift to a service economy. Some of the more volatile manufacturing industries constitute a smaller share of the economy today. The rise of service industries has given the economy greater breadth and balance.

• Better information and management. A widely held view is that policymakers at the Fed, and business leaders, now have timelier data on the economy. Corporations manage their inventories more wisely. The Fed, while still often criticized, has a stronger reputation for fighting inflation without hurting the economy's natural growth.

• Flexible markets. Fed Chairman Alan Greenspan has repeatedly cited a wave of deregulation as a crucial factor enabling the economy to cushion shocks. In labor markets, growing flexibility has meant ongoing layoffs, but it also has spurred job creation that has kept unemployment low.

• New financial tools. In a recent speech, Mr. Greenspan said that new instruments for spreading risks have helped create "a far more flexible, efficient, and hence resilient financial system than the one that existed just a quarter century ago."

• Worker productivity. The rapid growth of labor output per hour in recent years has allowed for stronger economic growth without fueling inflation.

Also, foreign governments and investors are now happy to invest in US bonds, allowing the US to become the world's great debtor. Economists say that imbalance will need to ease eventually.

Still, for all the genuine concerns out there, the "R word" that most economists are using is still resilience, not recession.

As economist Nariman Behravesh of Global Insight puts it, "We seem to be able to absorb serial shocks."