By Steven Denike
You’ve heard it time and again. This is the worst economic expansion of the post-World War II era. Since the Great Recession ended in June 2009, the economy has grown at just a 2.1% annual pace – over a full percentage point worse than the 3.2% average rate of growth experienced over the last 70 years, and far below the 4.7% average of recoveries alone. Indeed, by many metrics, this has been a subpar recovery.
However, some historical context is useful here and we believe post-war recession recoveries are the wrong frame of reference. Typically, the deeper the recession, the stronger the recovery has been. But, as the name conveys, the Great Recession was not an ordinary recession (it was caused by a full-blown financial crisis). To understand why growth has been so disappointing we need to examine what happened after similar crises in the past.
Nearly a decade ago, economists Carmen Reinhart and Kenneth Rogoff did just that by studying the aftermath of a set of significant credit collapses around the globe. What they found was prescient. The contractions in economic output and employment resulting from such financial crises are severe, with prolonged and deep declines in asset prices and an explosion of government debt.
However, their key finding was that even once the economy begins to recover, its rate of growth does not quickly snap back in strength. Rather, the necessary periods of deleveraging that follow the collapse of credit bubbles lead to recoveries that are slow and protracted, a length of time measured in years not months. Follow-up studies by the International Monetary Fund found that as much as a decade after such crises, real GDP is substantially lower than it would otherwise have been.
From this perspective and given the headwinds confronting it, the U.S. economy has come a long way and, in many respects, deserves more credit than it has received. For example, more than 13.1 million jobs have been created during this expansion, and the unemployment rate is now back down to 5% (not far from where it was before the recession began). Household net worth, thanks in large part to the equity bull market and recovering home prices, is nearly $20 trillion higher today. Real disposable personal income has grown 15%, total business sales are up 6%, and the federal deficit has improved to prerecession levels.
Still, despite all the progress made, the economy has failed to break out of its roughly 2% annual growth pattern, and there is little to suggest it will do so anytime soon. The reasons for this are not yet entirely clear. Some have argued that a “secular stagnation” is to blame, with slow population growth and limited innovation causing a decline in private investment that creates a self-fulfilling prophecy of slow growth. Others, including former Fed chair Ben Bernanke, cite a “global savings glut” where investment is held back by changing demographics as well as specific trade and economic policies of certain countries.
While both these theories have their merits, neither seems to offer a definitive explanation, or a quick fix to break out of the slow growth trend. There is, however, a silver lining. The virtue of the painful period of deleveraging that followed the recession is that it has left business, bank, and household balance sheets in their healthiest shape in decades. However, the slow growth that has accompanied it has prevented excesses from rebuilding.
The current economic expansion, which will turn seven years old in June, has already lasted far longer than the 58-month average of post-war recoveries. Still, it is important to remember that expansions do not die of old age. Instead, they are typically ended by a combination of rising imbalances and significant central bank tightening. Right now, none of the usual warning signals are flashing: no overinvestment, no overconsumption and no overaggressive policy action.
None of this is to say there are no risks on the horizon. But the natural tendency for economies is to grow, and barring an exogenous shock, we think this expansion (while aging), may still have plenty of room to run. More of the same may not be exciting, and we share the frustration of most Americans over the uneven, slow pace of growth that we are experiencing. However, we also think that one of the longest expansions in U.S. history is nothing to scoff at either.
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