Despite a great deal of pessimism, the US economy is booming. Real GDP grew by 4.8% in the first quarter, while "core" real GDP (consumer spending plus fixed investment) expanded at a 6.4% annualized rate. Excluding the volatile transportation sector, durable goods new orders surged 2.8% in March and are up 9.6% in the past year. Sales of both new and existing homes exceeded expectations in March, while commercial and industrial loans have expanded at a 14.5% annual rate during the first three months of 2006. For April, Wal-Mart blew away expectations and reported 6.8% same-store sales increases.

The reasons for this boom are entirely understandable. First, the US is experiencing an unprecedented period of productivity growth as technology proliferates. Second, tax rates on long-term capital gains and qualified dividends were dialed back to 15%in May 2003 - which turned on the entrepreneurial spirit almost instantaneously. Third, monetary policy remains accommodative, a fact that has been widely, and wildly, underappreciated.

Even though most people think of the Fed in terms of interest rates, in reality the Federal Reserve only controls one policy tool - money. When the Fed adds money to the economy, the growth rate of nominal GDP (otherwise referred to as total spending or aggregate demand) accelerates. When the Fed subtracts money from the economy, nominal GDP growth slows. In short, the amount of money in the economy determines the level of spending.

Nominal GDP slowed from roughly 6% growth in the late 1990s, to a deflationary 3% in the early 2000s. Since 2002, nominal growth has accelerated to its current rate of 6.7%. This acceleration in nominal GDP growth is an obvious signal of accommodative monetary policy. Rising commodity prices and a falling dollar also indicate that the Fed has been adding more liquidity than the economy really needs.

Historical relationships show that a growth rate of 6.5% in nominal GDP means that the neutral federal funds rate is somewhere between 5.5% and 6.0%. The longer the Fed holds rates below that level, the faster nominal GDP will grow, which in turn drives up the level required to be "neutral."

The bottom line is that the Fed is still accommodative. In addition, technology and tax rates are positive forces boosting the economy. For this reason, the economy is highly unlikely to slow as the conventional wisdom believes. The boom will continue.

(Brian Wesbury is the Chief Economist for First Trust Advisors in Chicago, IL)