- The Washington Times - Sunday, June 15, 2014

The U.S. economic recovery has distinguished itself as one of the weakest since World War II, but at five years and counting, it may go down as one of the longest as well.

After taking off in June 2009 after the Great Recession, which was the deepest postwar recession, the economy this spring surpassed the average length of the typical postwar recovery, which is 58 months. With no end in sight, it now appears the recovery will rival the longevity of the 1960s, 1980s and 1990s expansions.

The length of the expansion may seem like big news to many. Opinion polls show most Americans believe the economy is still in decline because meager job and income gains have left most people in the same financial condition — some even worse — than they were before the recession. Only those with the highest incomes have made substantial gains.

The economy just last month recouped the 8.7 million jobs lost during the recession, the longest time of any recovery for jobs to get back to the break-even point.

Ironically, it is the same steady and uninspiring growth that is likely to make the weak recovery one of the longest, economists say.

“The odds of recession in the next several years are low — between 10 percent and 15 percent” — in part because of the subpar performance of the economy, said John Canally, an investment strategist at LPL Financial. He estimates that, after five years, “we are somewhere in the ‘middle innings’ of the recovery.”


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Under Mr. Canally’s calculations, the recovery could rival the 10-year expansion of the 1990s, which was the longest on record.

“The overall pace of growth in this expansion has been below average,” with inflation-adjusted growth up by 11 percent since the recession compared with 19 percent on average after the first five years of other recoveries, he said.

Part of this is because of the U.S. economy’s transformation in the past 30 years from one driven by manufacturing products for sale in the domestic market to one driven by exports and growth in service industries such as retail, health care and education, Mr. Canally said. Less-dynamic sources have led to slower growth on average and longer expansions since the 1970s.

Slow growth’s silver lining

The subdued growth has had a silver lining, Mr. Canally said. “The tepid pace of the expansion thus far has not allowed imbalances to build up in the economy. These imbalances, such as overbuilding, overinvesting, or overspending, are typically what bring premature ends to economic recoveries.”

In the last expansion, for example, the housing market experienced a monumental bout of overbuilding, overinvestment and overspending, which resulted in the historic housing and financial collapse that brought down the economy in 2007. The long expansion of the 1990s came to an end after the technology boom of the late 1990s turned into a bust in 2000.

Mr. Canally said the current economy exhibits no evidence of such boom-bust cycles and the lackluster growth in nearly every sector ensures plenty of room for growth in the next few years without reaching limits on business capacity.

For the expansion to continue, it will be particularly important for businesses to increase investment in technological equipment in the next few years, he said, because such spending improves productivity, expands capacity and enables the economy to keep growing without inflation.

The Federal Reserve and the Congressional Budget Office also forecast the expansion to last an unusually long time. Meanwhile, a consensus appears to be building on Wall Street that the economy is only halfway through the expansion, feeding the strong stock rally this year.

“We believe the economy is still within midrecovery, with international and domestic economies showing more room to grow toward capacity,” said Stuart T. Freeman, chief equity strategist at Wells Fargo Advisers. “We have already experienced years of job growth and consumer sentiment expansion, but appear to be just now approaching capacity-utilization levels” that will force businesses to increase investment so they can expand and satisfy rising demand, he said.

As the current recovery has not broken a 4 percent pace since its outset, inflation in nowhere in sight. “We would ordinarily expect to see more inflation after five years of expansion.”

Inflation has been so low in this cycle has been able to keep rates at record lows without fear of igniting an inflationary spiral.

The Fed at bay

The U.S. stock market has prospered under the Fed’s low-rate regime since 2008, and investors exulted this year at signs that the Fed will hold off any increase in interest rates for at least another year.

Analysts say “Goldilocks” growth — not too hot and not too cold — holds the Fed at bay and enables stocks to venture further into record territory.

Although many prefer strong growth that fuels a sense of momentum, overheated growth carries the threat of rising prices and puts the Fed into an aggressive, inflation-fighting posture.

During this expansion, however, inflation has declined to rates as low as 1 percent despite strenuous attempts at the Fed to prevent it. The Fed fears a bout of deflation, in which prices fall and the economy contracts. That has prompted the central bank to hold interest rates near zero for the longest time on record and to pledge to keep interest rates near zero for at least another year.

Higher interest rates are particularly lethal for the interest-sensitive housing market. Worry about another setback in housing is making the Fed cautious about raising rates, said Vincent Reinhart, chief economist at Morgan Stanley, who sees the Fed keeping rates near zero far longer than most analysts on Wall Street predict.

While the economy is picking up steam, the pall cast by high unemployment rates, heavy debts and financial losses during the Great Recession will prevent consumers and businesses from returning to a type of overexuberance that would threaten the recovery, he said.

“We are far enough out of the shadow of the severe financial crisis of 2008-09 that people will feel more open to taking risk,” Mr. Reinhart said.

Moreover, they feel wealthier after several years of double-digit gains in stock and housing prices, he said, but he expects growth to remain subdued compared with previous expansions.

“We are hedging our bets between the economy lingering for a longer time within the shadows of the financial crisis and a more typical post-World War II launch to escape velocity,” he said.

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