"Another thing people can do is make their character skinny in the first frame using x and z scale, and then restore the character's x and z to 100% in the final frame"

Yup! A technique sometime known as "shrink-wrapping" (although it's the exact opposite really...)

This technique can also be used to get dynamic clothing to fit characters other than the one it was designed for:

• Load the character and set to zero pose. Go to last frame (usually about 20) and set new key frame. (it's often a good idea to break spline at this point). Return to frame 1.
• Load the clothing.
• Twiddle with the dials for both the clothing and the figure til you get  a) the cloth looking a  reasonable length for the intended figure and as close as possible to the figure's shape in X & Z (err on the small side) and b) the figure fitted into the cloth (by whatever means needed - you can be drastic here if necessary..)
• Enter the cloth room and simulate. As the figure expands back to proper proportions, the clothing will be stretched to fit...
• Assuming all went well, export the clothing as .obj, (from the last frame or wherever it looks best), re-import the .obj save to props library...

Cheers,
Diolma

(PS - there are a couple of "gotcha's" that might crop up, but the above is the basic priciple..)