Jared Bernstein posts the chart above and notes that the US expansion is “getting on in years relative to all the others since the mid-40s”, though he’s also careful to note the large amount of variability around this figure.
This reminded us of two notes from earlier this year on the length and durability of the US recovery, written by two different sets of economists at Goldman Sachs.
The first note included this slightly more optimistic chart:
Although the current expansion is roughly the same age as that of the post-war average, it is young when compared against the expansions of the Great Moderation period.
The economists write that the current expansion is showing “early- or mid-cycle characteristics at the present time. Specifically: (1) output and employment are growing at a moderate pace, but there is still a great deal of economic slack, (2) the rate of improvement in economic activity has not peaked, in our opinion and (3) inflation is running below its pre-recession rate and has yet to pick up.”
Though as Robin Harding says, it’s wrong to think of a recovery’s age as deterministic. It’s likely that neither the average age of the Great Moderation expansions nor the post-war average tells much about the likely age of this expansion.
The second note made the broader point that recoveries following housing-bust-driven contractions “tend to be slow and protracted, in terms of housing-related activity and the broader economy. But slow recoveries also tend to be long-lived, with economic constraints loose, policy accommodative and equity markets robust.” (It defines “accomodative” as interest rates lower than in the pre-bust period. Here we won’t revisit the issue of whether low rates are a sign that policy is actually too tight, etc..).
A bit more from that note:
To help make that assessment, we rely on economic and market dynamics going into and out of 24 house price busts since 1970 across 15 OECD countries, each defined as an episode when house prices declined by more than 15%. We also look at a small subset of these: the ‘Big Five’ (Japan 1982, Finland 1991, Sweden 1991, Norway 1987 and Spain 1977), where housing busts broadened into wider banking crises. …
The conclusions we draw are that both the US and the UK are still in the early stages of a typical post-bust recovery. House prices have started to recover, but are likely to continue to appreciate for several more years, and economic growth has returned to trend, although output gaps remain wide open, unemployment rates are not a constraint and inflation is still subdued. Putting all that together, and using historical housing busts as a measuring stick, suggests that economic growth in the US and the UK has room to accelerate, and can continue to do so for some time.
Maybe. (Hopefully!) But a pessimistic interpretation is also possible. The latest financial crisis and recession happened in the middle of already-weird times for the economies of the developed world. Competing stagnationist theories are trying to account for the decades-long slowdown in productivity growth and, more recently, investment — some focussed on perennially slumping demand, others on supply-side fluctuations.
The relative influence of automation vs offshoring (vs other influences) on the labour market is subject to debate. Stagnant investment remains inexplicable. Among the issues that Bernstein raises, especially troubling is the decline of median household incomes. Remember also that the prior US expansion itself featured a notably sluggish jobs recovery. (Check out slides 9, 10, and 13 of Ed Leamer’s presentation and tell me they don’t make you nervous.)
Given these trends, the danger is that with the recovery proceeding at such a painfully shallow slope, some of the damage to the economy’s productive potential becomes permanent or semi-permanent, even if the expansion doesn’t tip into recession anytime soon.
Our own view is that the slack story does matter, at least for now. The US recovery seems due for a continued cyclical rebound largely because of various kinds of pent-up demand.
To be more specific, we still think the housing market recovery has some ways to go, especially given the potential for an increase in the pace of household formation. There are some poorly understood but probably serious constraints to this happening, including student loan debt and the reluctance of banks to ease lending standards. But according to some of the convincing analyses we’ve come across — see the Dallas Fed and Matt Busigin — the numbers are still favourable. In addition, some of the leading indicators for a pickup in capex have shown improvement lately; the deleveraging cycle appears to have stopped; and fiscal policy is set to be less of a drag in the coming years.
The first Goldman note cited above also lists the usual causes of post-war recessions: “Economic cycles do not die of old age. Instead, recessions happen due to monetary tightening as the economy overheats, built-up imbalances unwind (such as the collapse of the housing bubble), or unfavorable external shocks occur (such as the oil crises in the 1970s).”
There don’t seem to be any big, threatening imbalances whose unwinding would lead to a downturn. External shocks are by definition hard to predict, and therefore also hard to speculate about.
And the possibility of monetary policy tightening so much that it would lead to a recession also strikes us as unlikely, though we certainly do believe that it should be looser than it is now. We also worry that, as Gavyn Davies recently explained, the centre of gravity has shifted on the FOMC. Two themes seem to have moved the debate within the committee in recent months — concerns that QE and low rates will lead to financial instability, and a belief that there is less labour market slack than previously had been thought.
We interpreted Janet Yellen’s comments at the presser as reasonably dovish, in particular her comments on labour market slack and her dismissal of the new Summary of Economic Projections, which showed higher median forecasts for policy rates at the end of 2015 and 2016. But once again we could be wrong, or it could even be that she is something of a holdout on her own committee.