This month, the current U.S. expansion reaches the 107-month mark, making it the second longest business cycle expansion in the post-war period. Having just surpassed the 1961-1970 expansion (106 months), the next milestone is 120 months, the length of the 1991-2001 expansion. It’s looking increasingly likely that this expansion will continue for more than a year and will become the longest since World War II. Most economists will tell you that expansions don’t die of old age, but the odds of fatal missteps increase the older they get.
Output Growth Lags Other Expansions
During this expansion, economists have frequently lamented the lack of a more robust recovery. The slow start in this expansion in the wake of the Great Recession was counterintuitive to the thinking of most analysts, who expected a strong recovery following the worst recession in a generation. However, there is evidence indicating that recessions caused by financial crises tend to be deeper and have longer recovery times than normal recessions.
To compare growth rates across expansions, we indexed real GDP to the quarter including the start month of the four longest post-war expansions, as determined by the National Bureau of Economic Research (NBER). As shown in the chart below, real GDP growth in the current expansion lags the other three expansions—by a lot. As of the first quarter of 2018, real GDP has expanded by 21% since the beginning of the current expansion; this is far lower than the 36% compound growth we saw at this point in the 1991-2001 expansion. The chart also shows that the growth path for the longest expansions has continued to shift lower over time; the 1961-1969 expansion saw real GDP grow by 52% by the end of its ninth year, while the economy had grown by just 38% by the end of year eight of the 1982-1990 expansion.
Restrained Consumer Spending
Personal consumption, which comprises nearly 70% of GDP, has been a major contributor to the overall slow economic performance in the current expansion. Real consumption has grown by 23% since the summer of 2009, compared to growth rates of 41% and 50% at the same point in the expansions of 1991-2001 and 1961-1969, respectively. The reluctance of consumers to spend in this expansion is not surprising when you consider how much of the brunt of the last recession was borne by this group.
It was the housing market crash that precipitated the 2008-2009 recession, and the resulting collapse in housing values wiped out trillions of dollars from consumers’ net worth. During the recession, household net worth dipped by 14.2%, which doesn’t even include the $3.8 trillion lost in the months leading up to the officially defined recession period; taking that into account, households lost 19% of their net worth over the course of two years.
In fact, the 2008-2009 recession is the only one preceding the four longest expansions where we saw a decline in household net worth (although there was a slight one-quarter dip at the beginning of the 1961-69 recession). Even though the growth rate of household net worth during this expansion is on par with the other long expansions, the huge blow to households from the Great Recession had a lasting impact on their ability and willingness to spend during the economic recovery.
In addition, the slow recovery in the labor market was another factor contributing to the consumer’s reticence to spend. While employment is a lagging indicator and tends to continue to worsen in the early days of an expansion, we were already more than one year into this expansion before the economy saw consistently positive monthly job gains. The 1991-2001 expansion also got off to a pretty slow start; however, that expansion was averaging nearly 300,000 new jobs per month by year three while this recovery’s monthly average didn’t get above 200,000 until its fifth year.
Private Investment Lagging, Too
Consumers are not the only group that has shown uncharacteristic restraint during this expansion; investment by the private (non-government) sector has also lagged since the last recession. The explanations for this are subject to debate, but the residual effects from the deep recession certainly played a role.
Real private fixed investment has grown by 50% in this expansion, compared to growth rates of 89% and 76% at comparable points in the 1991-2001 and 1961-1969 expansions, respectively. Surprisingly, it’s not the residential component of investment that is lagging at this point in the expansion. Residential fixed investment was the laggard in the first four years of the expansion, but now this segment is up 53% since the end of the recession, compared to 49% growth for nonresidential investment. Why has investment outside of the housing market continued to lag?
One of the reasons the subpar performance of private investment has been such a surprise is the continued low level of interest rates. In the current expansion, interest rates (using the 10-year bond yield as a reference) have on average remained nearly 400 basis points below the rates we saw during the longest expansion (1991-2001). Normally we would expect a low interest environment to spur investment. However, the hangover from the collapse of the housing market left both consumers and businesses trying to shed massive amounts of debt and banks reluctant to loan out money. So, while the cost of borrowing was low, many companies found themselves unable to take advantage of the low interest rates.
We finally saw credit starting to thaw four or five years into the expansion. In fact, growth of real private fixed investment was closely tracking the 1991-2001 expansion for the first five years; however, the series diverge dramatically after that point. This inflection point coincides with the sharp decline in oil prices in the second half of 2014; the price of West Texas Intermediate crude oil fell from a peak of $106.88 per barrel in June 2014 to a low of $53.49 per bbl by the end of the year. While the energy extraction industry feels the brunt of the impact from plummeting oil prices, the oil industry supports a broad network of upstream suppliers who will suffer significant knock-on effects. It’s not surprising to see overall investment growth hurt as a result. It’s not clear, however, if this completely explains the lack of private investment spending.
The U.S. Economy is Not Alone
The subpar economic growth seen in the U.S. following the global financial crisis has been experienced by other countries, as well. Whatever the causes of middling economic growth in the U.S., the same factors have been at work around the world due to the increasing level of global economic interdependence.
However, the International Monetary Fund (IMF) asserts that on a global basis we have seen a broad and synchronized economic upswing since mid-2016, driven by stronger-than-expected growth in the eurozone, Japan, China and the United States. In the April 2018 edition of its World Economic Outlook publication, the IMF reported, “Growth this broad based and strong has not been seen since the world’s initial sharp 2010 bounce back from the financial crisis of 2008–09.”
While the performance of the U.S. economy since the Great Recession has largely been a disappointment, the perceived mediocre growth is likely a contributing factor in this expansion’s length. Now that this expansion has outlasted all but one in the post-war era, economists are starting to place their bets on when the next recession will hit.