At the end of this month, the US will have enjoyed its second-longest period of economic expansion in history, beating the upswing under John F Kennedy and Lyndon Johnson between 1961 and 1968. The US has beaten the record 10-year period of growth between the end of the Gulf war in 1991 and the 2001 dotcom bust. A dramatic cut in interest rates and a $1 trillion government rescue package prevented the US economy falling off a cliff in 2008 and kept inflation from falling below 1%. But efforts to boost inflation back above 2% only achieved momentary success in 2012. Nevertheless, the US central bank, the Federal Reserve, has increased the cost of borrowing four times since 2015 and plans several more rises this year.
The reasons for America’s recovery are simple. Interest rates were cut quickly and aggressively by the country’s central bank, the Federal Reserve, and kept at rock-bottom levels for seven years. The Fed also pumped trillions of dollars into the economy through the process known as quantitative easing – buying bonds to expand the money supply. Swift action was taken to clean up the financial system so that the banks could start lending again. Obama announced a modest package of tax cuts and spending increases. Lessons were learned from the mistakes of the Great Depression in the 1930s when demand was sucked out of an already weak economy and banks were allowed to fail. The measures got the US slowly moving again. It helped that the authorities in Beijing were simultaneously using even more aggressive measures – big infrastructure projects and expansion of credit – to stimulate the Chinese economy.
Nevertheless, traditionally, the US has recovered sharply from downturns and had several years of fast growth. In the 1960s, for example, the US economy grew by 4.9% a year on average while in the 1990s it expanded by 3.6% a year on average. The average during the current expansion is 2.2% and it is the first business cycle since the second world war in which there has not been a single year of growth above 3%.
At 1.4% a year, employment growth has also been modest. America’s hire-and-fire culture has meant workers can be laid off in large numbers during recessions and then taken on again during the subsequent recoveries. In the 1980s upswing, for instance, jobs growth averaged 2.8% a year.
US wages have waxed and waned during each of the postwar recoveries except for the most recent one, which has seen wage rises remain low for almost the entire period. Economist Robert J Shapiro says automation in the internet age has been one of the biggest factors depressing wages.
Nor has the recovery followed Kennedy’s dictum that a rising tide should lift all boats. Half of the growth during Obama’s presidency went to the top 1% of US households, with the lack of real income growth for middle America helping to explain both the muted nature of the upswing and the discontent that propelled Trump to the presidency.
All upturns come to an end sooner or later and the fact that it is now almost nine years since the US emerged from recession has inevitably led to speculation about when and how the next downturn will arrive. Dario Perkins, managing director of global macroeconomics at the research company TS Lombard, says he thinks, the end will come – as it did in both 2001 and 2007 – with the popping of an asset-price bubble. “Recent history suggests any problems are more likely to start in the financial sector and with central banks tightening policy and asset prices high by historical standards, this is surely the area to watch over the next 12 to 18 months.”