Economic recovery has been ‘decidedly mediocre’

Score one for the tortoise.

By the end of July, the U.S. economy will have expanded for 121 consecutive months, eclipsing the previous record of 120 months set during the techdriven boom of the 1990s. According to the National Bureau of Economic Research, the current expansion is slightly more than double the average length of the 11 growth cycles since World War II and about triple the length of the 33 expansions since 1854.

Longevity notwithstanding, the economic rebound from the Great Recession has been decidedly mediocre in terms of actual output, with GDP increasing by 45% over the last 10 years, compared with about 75% during the 1980s and 1990s. Annualized growth was similarly depressed, averaging only two-thirds of the rate of the previous three business cycles.

The subpar numbers can’t be blamed on lack of government support.

On the fiscal side, government debt as a percent of GDP grew by 22% during those 121 months, the largest increase over any of the eight expansions since 1961. In fact, federal debt relative to the size of the economy fell during the four growth cycles prior to 1982, and by that metric, fell again over the long economic expansion of the 1990s. But since the 2001 recession ended, federal debt relative to GDP has ballooned from 83% to 105%, perhaps suggesting that structural changes in the economy could require fiscal stimulus in the future just to achieve modest rates of growth.

Monetary policy has been — and remains — similarly benevolent.

Benchmark interest rates were cut to zero about six months before the recovery from the Great Recession began, and stayed at rock bottom for seven years. Over that same period, the Federal Reserve bought — with money created out of thin air — $1.4 trillion of government debt, forcing longer-term borrowing costs down and, theoretically at least, boosting growth.

President Donald Trump has repeatedly excoriated Fed Chairman Jerome Powell for raising interest rates despite an economy that the president has called “the greatest” in history. Yet despite nine quarter-percentage-point rate hikes by the Fed since December 2015, borrowing costs in the U.S. are still far below levels that immediately preceded previous downturns.

At the onset of the eight recessions since 1960, the effective federal funds rate — the base cost of credit in the U.S. — averaged 4.5 percentage points above core inflation. Currently, with fed funds at 2.4% and the Fed’s preferred measure of core inflation at 1.6%, real short-term interest rates are under 1%. And if, as seems likely, the Fed cuts rates by a quarter-point this month, real fed funds will have fallen to half a percentage point.

Of course, current economic conditions differ markedly from those of the last half of the 20th century, leaving the Fed open to charges that it’s using the wrong playbook. An aging population, combined with less immigration, fewer births and the disinflationary effects of information technology, have kept inflation under wraps.

Though interest rates are the match that lights the recessionary fuse, debt is the fuel that blows up an expansion. In 2008, that fuel was subprime loans. Next time, it could be non-financial corporate debt, which recently hit an all-time high of 75% of GDP. But the financial sector also has exposure to over $1 trillion of leveraged loans, which could restrain the ability of banks to lend if even a portion go bust.

Whenever it arrives, the next downturn could prove difficult to treat.

To offset the eight recessions since 1960, the Fed cut benchmark rates by an average 6 percentage points, with no reduction smaller than 3 percentage points. Even if rates were again to fall to zero in coming years, the magnitude of that reduction would be only 2.3 percentage points, suggesting the Fed might need to rev up printing presses.

While no previous U.S. expansion endured for more than a decade, some countries have enjoyed longer growth cycles, most notably Australia, which hasn’t had a recession in 28 years.

For the optimists among us, that’s less than half the lifespan of a tortoise.

Tom Saler is an author and freelance journalist in Madison. He can be reached at tomsaler.com.