THE ECONOMY is behaving like a precocious child these days. It is top of the class, way ahead of rival students such as Japan and Germany. It excels at all subjects: Unemployment is down, the stock market is up and furious innovation in areas such as computing and bio-tech promises a future of bountiful A grades. And yet, like a precocious child, the economy is highly strung; it can be smug; it is intoxicated by its own brilliance. Faced with these warning signs, the responsible parent should be concerned about the danger of a breakdown.
Just recently, the overachiever's positive side has been most evident. On Wednesday the Commerce Department announced that the economy grew at an annualized rate of 5.5 percent in the third quarter of this year, even faster than previously reported. Inflation clocked in at an unalarming 1.7 percent, lower than in the previous three months. A separate report found that unemployment was heading down from its rock-bottom level of 4.1 percent, and a survey of help-wanted ads showed that firms are vying to recruit scarce workers. Meanwhile the stock market levitates calmly.
All this good news comes on top of a remarkable set of numbers, released earlier this month, suggesting that the productivity of American workers has been rising faster than anybody realized. It now seems that workers have upped their output per hour by an average of 2.6 percent a year since 1996, a rate nearly as impressive as that of the glorious 1960s. Productivity is the most important measure of an economy's strength: If it grows, wages and profits and stock prices can grow too, without triggering inflation. The new productivity numbers therefore are celebrated by those who trumpet a "new paradigm" -- an era in which traditional limits to growth are shoved aside by the advance of miraculous technology.
The trouble is that, however well the economy is doing, it is not capable of the feats believers now expect from it. The recent productivity data do suggest that the sustainable rate of growth has risen from the old rate of 2.5 percent. The new rate may be 3 percent or even 3.5 percent -- but it cannot conceivably be the 5.5 percent at which the economy is now advancing. Equally, the advent of the Internet is doubtless wonderful for growth, but that does not mean that .coms with no profits should be valued in the multimillions.
The need for caution is obvious to policy makers. The Federal Reserve has been nudging up interest rates in an attempt to cool growth, and the Treasury is happy to be paying down the national debt rather than fueling expansion with tax cuts or extra spending. But households do not seem to share such cares. They have been spending everything they earn, then running down their savings too, as though today's good times can only get better.
Friday's post-Thanksgiving sales were, by most accounts, more frenzied even than usual. Store managers arrived at work before dawn and found customers already lining up to spend the new paradigm's promised riches. Reports in many areas around Washington are of houses selling immediately for more than the asking price, of mortgage lenders desperate to throw money at buyers, of workers happily living above their means because they have stock options that may -- or may not -- soon be worth a fortune. Many people seem to have forgotten that booms do end.