U.S. Economy Celebrates 10 Years of Growth, But No One’s Partying

Article originally posted on HERE on June 6, 2019

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Tune out the trade wars. Pay no attention to the signal of a looming recession being emitted by the bond market. It’s time for a birthday party!

This month marks the 10th anniversary of the U.S. economic expansion that began in June 2009. If the streak continues into July, it will make history, surpassing the 1991-2001 growth cycle to become the longest since 1854, which is as far back as economists have attempted to date business cycles.

The achievement is impressive, but few are in the mood to celebrate. It’s partly a matter of timing. The risk of a downturn is rising, amplified by heightened trade tensions with China and now Mexico. IHS Markit’s U.S. Manufacturing Purchasing Managers’ Index fell in May to its lowest level since September 2009. On June 3 the yield on three-month Treasury bills exceeded that on 10-year Treasury notes by the most since 2007, a strong indicator that a recession is somewhere on the horizon. JPMorgan Chase & Co. says the probability of one beginning in the second half of 2019 has risen to 40% from 25% in early May.

The other reason people are blasé about this milestone is that the expansion has been nothing to brag about. Like Lonesome George, the giant tortoise in the Galápagos Islands who lived past 100, it’s clumped along slowly, never overheating, which is part of the reason for its longevity. Yet we’ve had peppier extended growth cycles before. In the first 39 quarters of the record expansion of 1991-2001, gross domestic product increased 43%. In the 39 quarters through this March, U.S. GDP grew just 22%. And the sluggish expansion has benefited capital more than labor: Workers’ share of national income has fallen from 68.9% to 66.4% over the period.

At its present pace, this run would have to last six more years to match the aggregate growth of 1991-2001, and nine more to replicate the go-go growth of 1961-69, when GDP expanded 54%, according to calculations by Nir Kaissar, a Bloomberg Opinion columnist who’s founder of asset manager Unison Advisors. “I characterize this as the recovery of fits and starts,” says Michelle Meyer, head of U.S. economics at Bank of America/Merrill Lynch & Co.

The hallmark of this expansion has been underperformance. The Federal Reserve repeatedly predicted it would need to raise interest rates to temper excessively rapid growth—then repeatedly put off hiking because growth came in below expectations and inflation languished below the Fed’s 2% target. The central bank finally did start ratcheting up rates in earnest at the end of 2016, by a total of 2 percentage points over two years. But it put its tightening campaign on hold after its December meeting, when plunging stocks, trade tensions, and a partial government shutdown rekindled fears of a slump. As of June 5, the federal funds futures market saw a 95% chance that the Fed would cut rates at or before its September meeting.

Growth is lukewarm despite stimulative fiscal policy from Congress and the White House. The federal budget deficit had shrunk to just over 2% of GDP at the end of 2015, but it’s widened to almost 4.5% since, thanks to the big tax cut at the end of 2017 and more spending, particularly on defense.

The single best indicator of this expansion’s weakness is the cost of money, as measured by the real interest rate, which strips out inflation. The yield on 10-year Treasury Inflation-Protected Securities fell from 4% during the effervescent dot-com boom at the end of 1999 to below zero in 2012 and 2013. It rebounded to just over 1% late last year but has sagged back to 0.4%. When money is this cheap, it indicates weak demand for credit or an overabundance of savings—or both.

“The secular stagnation psychology has taken hold of the economy more than it’s taken hold of economists”

To Harvard economist Lawrence Summers, the expansion has all the features of “secular stagnation.” That’s a situation of chronically weak demand, in which satisfactory growth can be achieved only by extreme fiscal and monetary stimulus. He figures that secular stagnation plagued the U.S. in the 1950s and early 2000s, in addition to the Depression of the 1930s, and believes it’s now hitting much of the developed world, including Japan and Europe. In fact, he says, “We are doing by far the best.”

A Republican-controlled Congress turned down Obama’s requests for continued fiscal stimulus but said yes to Trump. However, the 2017 tax cuts were tilted toward the rich, who don’t tend to spend windfalls, and businesses, which haven’t stepped up investment significantly. The National Association for Business Economics said in January that in a poll of its members, 84% said their companies hadn’t boosted outlays or hiring in response to the tax cuts.

Kevin Hassett, chairman of Trump’s Council of Economic Advisers, argues that the business tax cuts lifted spending on plant, machinery, and software onto a higher track. That will continue to pay dividends for the economy even if the growth rate of new investment returns to its pre-tax-cut pace, he says. Hassett, whose planned departure from the CEA was announced by Trump in a tweet on June 2, also credits the administration’s policies with sustaining a high pace of job growth.

The indisputable achievement of the current expansion is the decline in unemployment: At 3.6%, the rate in May was the lowest in half a century. Employers’ eagerness to hire is benefiting people who ordinarily have a hard time landing jobs—the less educated, the handicapped, racial minorities, and older workers, among others. Wages have started to rise as well. Average hourly earnings in April were up 3.2% from the previous-year period, outpacing inflation. The availability of jobs (along with a generally rising stock market) is lifting consumers’ spirits. The Bloomberg U.S. Weekly Consumer Comfort Index this year has been fluctuating around its highest level since 2000.

Yet even on unemployment, there’s less than meets the eye. People who’ve stopped looking for work or who are working part time even though they’d prefer full-time work aren’t counted in the government’s main measure of unemployment. Only 3.1% of men age 25-54 were officially unemployed in April, but an additional 10.8% were out of the labor force entirely, according to the Bureau of Labor Statistics. “The United States is still a long way from full employment,” says Dartmouth College economist David Blanchflower, author of Not Working: Where Have All the Good Jobs Gone?

The invisible reserve of labor keeps a lid on wages for those who are working. Summers argues that even with today’s low unemployment rate, some workers remain afraid they’ll lose their job if they ask for a raise. “The secular stagnation psychology has taken hold of the economy more than it’s taken hold of economists,” he says.

The task of dating the beginning and end of an economic expansion falls to academic economists who sit on the Business Cycle Dating Committee of the National Bureau of Economic Research. Unlike other countries, the U.S. has no simple rule of thumb, such as two consecutive quarterly declines in GDP mark a recession. The committee takes a wide range of economic data into account, including jobs and incomes. It judges an expansion to begin in the month when things remain bad but have stopped getting worse. Likewise at the top, even if things are very good but not quite as good as the month before, a recession may have set in. The committee generally waits a year or so to pinpoint the top or bottom of a business cycle.

Expansions typically end when the central bank raises interest rates excessively in an effort to stave off inflation caused by strong demand. Less often, they’re cut short by a financial crisis, as in 2007-09, when irrational exuberance led to too much borrowing and then a wave of defaults and liquidations. Because of the tortoiselike pace of this expansion, price pressures have been muted. Also, there’s little evidence of the kinds of bubbles that ended the last two expansions.

Still, our pretty-good times can’t last forever. Merrill Lynch’s Meyer says, “I do think we’re in the late stages of the cycle.” That seems to be the consensus as well among bond investors, who’ve driven the yield on 10-year Treasuries down to just 2.1%, the lowest in two years. (Stock investors, on the other hand, are relatively optimistic.)

In 1931 the great British economist John Maynard Keynes wrote about the risk of a prolonged period of subpar growth: “the long, dragging conditions of semi-slump, or at least sub-normal prosperity” following a recession. Optimistically, Keynes said policymakers had the means to treat such a condition, but only if they choose to exercise their power. Blanchflower, who cites Keynes in Not Working, writes: “That quote sends shivers down my spine every time I read it.”

BOTTOM LINE – The 10-year run of U.S. growth, possibly nearing its end, will be remembered as a long but tepid expansion. Its slowness probably prolonged its life.