The US Economy: Growth Has Been Weak But Long-Lasting
FORECASTS & TRENDS E-LETTER
by Gary D. Halbert
October 18, 2016
- Why This Economic Recovery Has Been So Disappointing
- The Fourth Longest Economic Expansion on Record
- One Chart Shows Why So Many Americans Feel Poor
- Are You an Accredited Investor? Be Sure to Let Us Know
Forecasters who were predicting a surge in the economy in the second half of this year have revised those estimates much lower in recent weeks. It now looks like the economy may not achieve even 2% growth this year. Today, we’ll look at some of the reasons why.
While economic growth has been anemic, the recovery since mid-2009 has been the fourth longest in history. Since World War II, the US economy has typically grown for about five years on average, as shown below, and then had a contraction. This expansion, which officially began in June 2009, is already over seven years old.
[drizzle]Increasing numbers of Americans feel “poor.” I will provide one particular chart today which illustrates why so many people feel that way today. I think you’ll find it very interesting. Let’s get started.
Why This Economic Recovery Has Been So Disappointing
The US economy grew at an annual rate of only 1.1% in the first half of this year. That was well below predictions late last year of 3+% growth for all of 2016. Likewise, many forecasters suggested that GDP growth would surge in the second half of this year. But as I wrote last week, most predictions of 3-4% growth in the second half have been pared back to around 2%.
This has been a distressingly consistent pattern in recent years. With the exception of a strong quarter here and there, economic growth has been stubbornly disappointing ever since the Great Recession ended in mid-2009. Growth in US gross domestic product has averaged only about 2% since then, compared with 4.6% on average during the recovery following the recession of the early 1980s.
The problem goes beyond the current recovery and beyond the US. For most of the 21st century, the developed world – the US, Western Europe and Japan – has been stuck in a pattern of slow economic growth. In the US, the boom of the late 1990s ended with the bursting of the dot-com bubble; the recession that followed was relatively mild, but the recovery was weak. It took another bubble, that time in housing, to get the economy moving again. And as we all know, that bubble ended with the Great Recession and a financial crisis.
Economists aren’t exactly sure what’s behind the prolonged global slowdown. Aging populations certainly play a significant role – more retirees means fewer people working, which, all else being equal, means less economic growth.
But that isn’t the full story. Even setting aside retirees, fewer adults are working, especially men. As I wrote on September 6, some 8-10 million working-age (25-54) US males have disappeared from the workforce and many, if not most, have given up looking for work.
And among those who are working, productivity has been growing more slowly. Productivity is measured by how much value people produce for each hour they work. Some economists, most prominently Northwestern University economist Robert Gordon, argue that the Internet and other recent technological advancements haven’t boosted the economy as much as past innovations such as electricity and air travel.
Yet whatever the explanation, more and more economists are convinced the trend is here to stay. In a 2013 speech at the International Monetary Fund, former Treasury Secretary Larry Summers became perhaps the first prominent economist to talk about “secular stagnation,” a wonky term for the idea that low-growth is a long-term trend, not a short-term effect of the recession.
Since then, the idea has gone mainstream. In August, John Williams, the president of the Federal Reserve Bank of San Francisco, wrote an essay looking at what policymakers can do in a world of sustained low interest rates. His conclusion was, not much.
Later in August, Fed leaders dedicated much of their annual retreat in Jackson Hole, Wyoming to similar discussions. One conclusion was that the Fed is playing catch-up, since economic growth has consistently fallen short of policymakers’ expectations throughout the recovery.
This is far more than an academic debate. If the underlying growth rate of the economy has slowed, that means it will take less to push the US into a recession, and it will be harder for policymakers to pull it out.
Likewise, there are consequences in addition to recessions. Slow economic growth generally means weak wage growth, which is why many Americans saw little benefit from the recovery until only recently. Wages grew by 2.6% in the 12 months ended in September.
Japan and Western Europe have fared even worse. Japan has been locked in a generation-long slump, and Europe has never seen a meaningful recovery after the global financial crisis. In Europe especially, the prolonged downturn has created a generation of young people who can’t find work and of older workers who can’t afford to retire.
Despite unprecedented quantitative easing by central banks around the world, and near zero (or even negative) interest rates, the economies of the US, Western Europe and Japan continue to grow well below their post-recession averages, with no end in sight.
The Fourth Longest Economic Expansion on Record
As noted above, the US economy has grown by only 2% per year on average since the Great Recession ended in mid-2009, making it the slowest recovery since records have been kept. Yet while growth has been disappointing, this is the fourth longest recovery in history going back to 1850.
Since World War II, the US economy has typically grown for about five years on average, as shown below, and then had a contraction. This expansion, which officially began in June 2009, is already over seven years old.
September marked the 86th month of this economic recovery. If it continues into February, it will become the third longest recovery on record. It would have to continue for another three years to break the all-time record of 120 months.
So far, this recovery has occurred entirely during President Obama‘s time in the Oval Office, making it the longest expansion under a single president. The growth streak would need to extend just a little more than halfway through the next president’s term to achieve a modern record.
The bright spot in this seven-year recovery is jobs. While the rate of economic growth has been disappointing, the average pace of job growth in this recovery has already topped what happened during the 2001 to 2007 expansion under President George W. Bush.
Over 14 million jobs have been added since the low point from the financial crisis. Job growth is as important – if not more important – than overall growth, many economists argue. “We are experiencing the longest string of consecutive monthly jobs gains in economic history,” says Mark Zandi, chief economist at Moody’s Analytics.
The unemployment rate has gone down by half and now stands at 5.0%, down from a high of 10% in 2009. About 245,000 people applied for unemployment insurance last week, down from 595,000 during the second week of