The Economic Recovery Is Ten Years Old, How Much Longer Can It Last?
The current economic recovery turns ten years old this month, but it can't last forever.
Ten years ago this month, the U.S. economy, which had been rattled over the course of the previous two years or more by the most serious economic downturn since the Great Depression, began the long, slow process of recovering. That recovery has now reached 120 months, tying it for the longest in the period of the Great Depression. If the positive economic growth continues into July, which it most likely will, then we will officially surpass what had been the longest economic expansion, the one that lasted from March 1991 to March 2001 and was buoyed by, among other things, the dot-com boom of the mid-1990s and historically low prices for oil in the wake of the 1991 Persian Gulf War. (Source)
In recent months, economic statistics have painted a somewhat ambiguous picture of the economy. While it does appear that the economy grew at a somewhat healthier pace than expected in the first three months of the year, analysts are expecting slower growth as we head into the rest of the year and look ahead to 2020. Additionally, while there have been a handful of strong months so far this year, the jobs market appears as if it may be slowing down if the results from February and May are any indication. While this doesn’t necessarily mean that we’re headed for a recession any time soon, but it’s clear that we’ll get there eventually even if it ends up being something far short of the Great Recession:
Imagine that you’re about to celebrate a big anniversary, but start running into unnerving problems.
First, you don’t know exactly when you should celebrate. Or, really, whether you should celebrate at all — and you won’t have a reliable answer for months, maybe years.
Even worse, you’re in no mood to mark the occasion. Nasty issues keep cropping up. They have already killed the buzz for this year’s party — and might ensure that you won’t be celebrating again a year down the road.
That predicament is, more or less, why there may not be revelry for a rare achievement of the United States economy: 10 years of growth without a recession. That has happened only once before, during the long expansion that ended in March 2001. Instead, we are likely to see a sober anniversary, burdened by hypotheticals and gloomy predictions.
With a trade war, simmering income inequality, a disappointing jobs report and shaky markets affecting the mood, this may not be the perfect time to pop the corks. But part of the problem is fundamental: It’s not entirely clear that the economy has set a record, nor is it certain when we will know if it has.
This much can be safely said: “If the United States makes it past July 1 without a recession, the current economic recovery will turn out to have been the longest in American history.”
That careful formulation came from James Poterba, an M.I.T. economics professor. As president of the National Bureau of Economic Research (widely known by its abbreviation, N.B.E.R.), his words are authoritative. The nonprofit research organization is the semiofficial arbiter of recessions and expansions in the United States.
In an interview, Professor Poterba qualified that statement further.
“We won’t know on July 1 that we are not already in a recession,” he said. And even if it turns out that the economy did keep growing through June, we don’t know exactly when the expansion started.
For more detail, I called Robert Hall, the Stanford professor who heads the N.B.E.R.’s Business Cycle Dating Committee, which rules on when recessions start and stop. I said I’d appreciate more clarity, but he said: “We don’t really know the answers.”
First, he said, “The committee’s microscope just isn’t accurate enough for us to pinpoint the actual date of a peak or a trough in the business cycle.” The committee only narrows things down to months. “That’s as precise as we’re comfortable with,” he said.
Then there’s another problem. The N.B.E.R. neither forecasts the future nor reports immediately on the past, he said. “We don’t even attempt to do forecasting,” he said. “We just try to measure what’s already happened. We go as fast as we can. But we take enough time to make sure that we’re right, sometimes a very long time. We’re proud of that.”
The core is this: “During a recession, a significant decline in economic activity spreads across the economy and can last from a few months to more than a year. Similarly, during an expansion, economic activity rises substantially, spreads across the economy, and usually lasts for several years.”
Discerning these changes takes so long because a cloud of ambiguity makes economic analysis difficult in real time. That opacity sometimes prevents policymakers, financial market participants and journalists from perceiving events accurately.
It’s entirely possible, then, that we’re actually in the beginning stages of a recession now. We won’t get the first indication of that until we get the first estimate of Gross Domestic Product growth (or retraction) for the second quarter of the year at the end of July. Even then, though, we won’t know officially because the “official” definition of a recession is two consecutive quarters of negative economic growth. That would mean waiting until the end of October when we’ll get the first estimate for third-quarter economic growth.
Until then, the economic statistics that will be released will paint what is, at best, an incomplete picture. The Jobs Report, for example, isn’t necessarily a good indication because the jobs market tends to be a trailing indicator of the economic situation, meaning that hiring or widespread job losses tend not to show up in the statistics until well after we’ve entered a period of negative growth. The same is true of other economic statistics such as consumer spending, durable goods orders, and factory orders. One group of statistics that’s worth keeping an eye on in this regard is the Index of Leading Economic Indicators, which consists of a wide range of economic statistics that analysts use to determine the current and future direction of the economy. The long and the short of it, though, is that figuring out if and when we’ve entered recession territory isn’t quite as simple as it sounds.
One factor that could have an impact on all of this, of course, is the Federal Reserve Board. Chairman Jerome Powell has made recent comments indicating that the Fed could end up changing course and reducing interest rates if it appeared that the economy was moving toward of recession, especially in light of the inevitable economic impact of the President’s idiotic trade wars. Indeed, one could say, as The Washington Post’s Heather Long puts it, that the fate of the economy rests in Powell’s hands:
President Trump has pummeled the Federal Reserve with insults in recent months, calling it “crazy” and blaming it for any stock market dives or ugly economic data. But now the president has thrust the fate of the economy into the hands of the organization — and the man — he has suggested he doesn’t trust.
Fed Chair Jerome H. Powell and other Fed officials have signaled this week that they may have to cut interest rates in coming months to keep the economic expansion going — and counter any economic harm from Trump’s escalating trade war.
Such a move would be highly unusual. It would come at a time when the economy has been growing quickly, and inflation and unemployment are low. And it could serve almost as an insurance policy on the impact of actions taken by the president, potentially facilitating his use of tariffs in unpredictable ways.
“The Fed never had to rescue the economy from past presidents’ trade wars, or from policies that presidents embarked upon against the wishes of advisers,” said Gary Richardson, an economics professor at the University of California at Irvine who used to be the official Fed historian.
The Fed is likely to signal its next step at its policy meeting this month, and markets are forecasting at least three interest-rate cuts by the end of the year. Powell said this week at a Fed conference in Chicago that the Fed is prepared to take “appropriate” action to keep the economy from a downturn, and stocks surged as a result.
The Fed could cut rates as soon as this month, or at policy meetings in July, September, October and December. Joseph LaVorgna, an economist at the investment bank Natixis, pointed out in a research note Thursday that “the Fed has never disappointed the markets’ call for action.”
The new trajectory is a sharp U-turn from where the Fed had been heading and poses risks whichever way the Fed’s thinking goes.
The Fed has enormous sway over the economy through its control of a benchmark interest rate that influences virtually all lending — from mortgages to corporate loans.
As recently as late last year, the central bank was on a campaign of interest-rate increases, moves aimed at keeping the economy from overheating and inflation from getting out of bounds.
At the beginning of the year, the Fed put those interest-rate increases on pause as a result of an expected slowdown in the economy, partly from the trade conflict with China.
Further interest-rate cuts could extend an economy that this month entered its 10th year of expansion. That’s important because many Americans only lately have begun to see the fruits of the hot economy in the form of healthy wage increases.
“The logic for the Fed is when you have interest rates so close to zero, you can’t wait for the markets to melt down. You have to act early to prevent that,” said Julia Coronado, president of MacroPolicy Perspectives and a former Fed economist.
If the Fed does cut rates, it will have an immediate impact on Wall Street, which would likely rise significantly in response to the move. One example of that can be seen in the course of the markets over the past two weeks. During the week before Memorial Day, the market was down significantly for several days in a row due to fears over the President’s trade war with China and signs that negotiations between the two countries had faltered. This week, though, the market had strong upward movement largely due to the aforementioned comments by Chairman Powell and especially to potentially counteract the impact of the tariffs. An interest rate cut or two would likely be seen as good news on Wall Street, not the least because it would mean that interest rates for bonds and other investments would likely decrease, leading investors to seek out the higher return of stocks. Additionally, interest rate cuts would likely have some impact on the economy and could potentially stave off a recession for at least a short period of time.
At some point, though, there will be a recession whether it comes next month or next year. That timing is important in one respect, of course, in that it will likely have a significant impact on the 2020 election.
On Friday morning, the Labor Department released its jobs report for May, which showed a sharp slowdown in hiring. Donald Trump was still in Ireland, preparing to fly back to Washington. He didn’t immediately react to the news that employers created only seventy-five thousand jobs last month, which wasn’t surprising. Trump hates acknowledging negative developments that occur on his watch, and he is surely aware that a slump in the economy could prove disastrous for his reëlection campaign.
Despite all the troubles and strife of his first two and a half years in office, he has been able to point to strong economic growth and a very low unemployment rate as reasons why Americans who aren’t enamored of him personally should support him. If that rationale is removed, what does Trump have left? A weakening economy could well be the biggest political threat he faces.
One month of weak jobs data doesn’t translate into a slump, of course. Despite Friday’s report, which also showed a modest fall in wage growth, most economists think that the economy is still in decent shape. When the National Association for Business Economics surveyed more than fifty economic forecasters recently, the average prediction was that the economy would grow by 2.6 per cent this year and 2.1 per cent in 2020. Such an outcome would represent a slowdown from the 2.9 per cent growth recorded in 2018, but a relatively modest slowdown that is unlikely to present very much of a political threat to Trump. (He’d still have to explain why G.D.P. growth hadn’t reached his target of four per cent, of course.)
However, even before Friday’s employment report, there were worrying signs of softness in other important economic indicators, particularly capital spending by businesses, and also evidence to suggest that this weakness was tied to Trump’s trade wars. As I noted in a column earlier this week about the resignation of Kevin Hassett, the chairman of the Council of Economic Advisers, business surveys show that Trump’s tariff threats, particularly those directed at China, are creating a lot of uncertainty, which is reflected in businesses taking a cautious approach to spending and hiring.
With the 2020 election seventeen months away, Trump now has a key decision to make: How far is he willing to push his trade wars even as the economy and financial markets are starting to emit some distress signals?
Jennifer Rubin makes a similar argument and notes that it could be Trump’s own policies that push the economy over the edge:
Trump, aside from overpromising on the tax cuts, has contributed mightily to the weakening economy. “Certainly a major factor in the current economic uncertainty is Mr. Trump’s trade war,” Rattner says. He notes that “the stock market effectively peaked a month ago when the president announced his expanded tariffs on imports from China. From its May 3 peak, the Standard & Poor’s index fell by 3.5 percent.”
Trump is hoping the Federal Reserve (which he delights in bashing) will bail him out. Indeed, a cut in interest rates is much more likely later this month. Whether that will counteract all the other factors noted above (plus a weakening of European economies) remains to be seen.
Few economists think a recession is imminent. However, as Jared Bernstein notes, “Headwinds have accelerated and the possibility of weakening demand is real.” He adds, “Obviously, the trade war and its potential escalation — opening the Mexican front in the war — are in the mix, as is the related weakness of U.S. business investment numbers. Germany, Europe’s alleged powerhouse economy, just posted big drops in industrial production and exports. As of this morning, second quarter U.S. GDP is tracking well south of 2 percent.” That’s a far cry from Trump’s promise of an annualized growth rate of 3 percent.
Politically, a downturn in the economy would be disastrous for Trump, who is hanging on in polls largely because of the economy. Take that away, and he’ll have to fall back on his other accomplishments. Oh, right, there aren’t any. Well, he’ll have to rely on his personal characteristics — except even some of his supporters think he is dishonest, erratic and ignorant.
Trump’s fate may very well depend more on the course of the economy than on anything Democrats will find in their investigations. That it should result from his own ignorant, impetuous trade decisions suggests political karma is real
As I have noted before, the President’s job approval on the economy is far better than his overall approval and it’s likely that his electoral prospects are better than they might otherwise be in no small part due to the state of the economy. If that changes, then it will likely impact those numbers. Timing then becomes a big issue. If we manage to stave off a downturn in 2019 then the odds of seeing one in 2020 will increase. Given that, we’re now at the point where keeping an eye on all of these economic statistics will be more and more important from a political point of view.