November marks the fourth anniversary of the current economic expansion. “The most recent [business-cycle] trough occurred in November 2001, inaugurating an expansion,” concluded the National Bureau of Economic Research (NBER) in 2003. A private research organization, NBER is universally recognized as the official arbiter of peaks and troughs for the U.S. business cycle. This timely period in the cycle is an appropriate moment to review how the ongoing expansion has unfolded since the 2001 recession officially ended four years ago this month and how it compares to other expansions over the past three decades when they turned four years old.
Admittedly, the current expansion took some time to take hold. But once it finally gained strength during the second quarter of 2003, it established itself as arguably the most steady, non-volatile expansion in 60 years. After the Commerce Department recently reported that gross domestic product had increased at an annual rate of 3.8 percent during the third quarter, the Wall Street Journal observed that it was the eighth consecutive quarter during which GDP’s annualized growth rate hit the range between 3 percent and 4.5 percent. That’s the longest such streak since World War II.
Moreover, during the last 30 months (or 10 quarters), when economic growth has averaged more than 4 percent a year, not a single quarter’s annualized growth rate has come in below 3.3 percent. The growth rate in excess of 4 percent over the past 10 quarters contrasts favorably with the 1.8 percent growth rate that prevailed during the first five quarters following the end of the recession.
Repeating the experience following the comparably shallow July 1990-March 1991 recession, the labor market deteriorated markedly during the early stages of the recent economic recovery. For postwar recessions prior to 1990, employment levels normally reached their troughs at the same time the economy reached its nadir, with the unemployment rate correspondingly hitting its peak within a month or two. During the last two economic recoveries, however, the economy continued to jettison jobs as the jobless rate ratcheted up. Even though the 1990-91 recession ended in March 1991 (when the unemployment rate was 6.8 percent), 11 months later the employment level was still 300,000 jobs below its March 1991 level, and the unemployment rate peaked at 7.8 percent in June 1992.
Following the November 2001 trough, employment levels continued to plunge; in August 2003, 21 months after the expansion began, the total of nonfarm payroll jobs was still more than one million below its level at the November 2001 trough. The unemployment rate, which stood at 5.6 percent in November 2001, reached its cyclical peak of 6.3 percent in June 2003. Since August 2003, however, more than 4.2 million jobs have been generated, reflecting a rate of job creation exceeding 160,000 per month and averaging nearly 2 million per year.
Beyond the lingering effects of the September 11 terrorist attacks and the uncertainty that prevailed before the war with Iraq began, a major reason why employment grew so slowly during the early stages of the current expansion relates to the soaring increase in productivity, or output per hour, in recent years. During the 15 quarters since the recession ended, nonfarm business productivity has increased by 13.4 percent. That is significantly higher than the cumulative 15-quarter productivity increases achieved following previous recessions (7.9 percent after the 1990-91 downturn; 11 percent after the 1981-82 recession; and 9.2 percent after the 1973-75 recession).
Measured by the core consumer price index (CPI), which excludes the volatile food and energy sectors, the economy’s underlying inflationary pressures appear to be relatively under control at this stage of the expansion. Specifically, the core CPI has increased by less than 2 percent over the past 12 months. At this stage in the expansions that followed the 1973-75, 1981-82 and 1990-91 recessions, however, the 12-month core CPI averaged more than 5 percent.
So, after a slow start, the ongoing economic expansion gained significant momentum, and on its fourth birthday, it remains strong. With unemployment at 5 percent following the creation of four million jobs during the past 24 months; with the economy having grown by more than 7.5 percent over the past two years; and with annual increases in productivity averaging 3.6 percent during the last four years, the U.S. economy shows little sign of running out of steam as its expansion enters its fifth year.