Are we in the midst of an overt Positive Aggregate Supply Shock in Manufacturing? A rare sighting indeed.

We can have all the demand for goods and services in the aggregate in the short run but occassionally, or in tandem, we need an increase in our ability to produce goods and services to feed that demand.

This is known as a Positive Supply Shock, which can be temporary or permanent. Trends are emerging that suggest we might be in the midst of a short run postive supply shock. If the short run increase in the economys potential to supply "stuff" leads to a permanent ability to produce goods and services, then we will have economic growth in the true sense of the term.

Two of the three points excerpted below address specific supply-side requirements---lower wages and lower energy costs. These are two important inputs that go into making finished goods/services.  The second point, depreciating of the dollar will help on the demand side for finished goods, but can hurt on the supply side for inputs/raw materials that are imported.

""Three trends suggest America's "manufacturing renaissance" is just getting started, says Neil Dutta, U.S. economist at Bank of America Merrill Lynch. First, the cost advantages of outsourcing factory work are narrowing. Emerging market wages, while still much lower than U.S. wages, are rising, and high oil prices have made shipping more expensive. That is expanding the range of goods U.S. factories can produce at competitive prices (think sophisticated machines, not toys).

Second, a weakening dollar makes U.S. goods more attractive to foreign buyers. The dollar has fallen by nearly one-third over the past decade against a basket of currencies including the euro, British pound and yen.

Third, energy production is booming in the U.S., and domestic natural-gas prices have recently plunged. That gives an edge to U.S. producers of fabricated steel, transportation equipment, machinery and chemicals, which use natural gas extensively, according to a recent report from Citigroup (Source of article: The Great Reversal: Playing the U.S. Manufacturing Boom)

Extra Credit: Draw an AD/AS Model of the economy showing it in recession.  Show and explain (using the context of this article) in the absence of government policy how the economy can return to full employment ON ITS OWN (Self-Correcting).