Markets and Economy

The Recovery Enters Uncharted Territory

The remarkable part of the current US economic expansion is not only its historic length, but also its unusual stability. Could the US economy be re-entering the Great Moderation?


Key points:

  • The recovery, now the longest period of economic expansion on record, has progressed in a relatively predictable manner.
  • The expansion has been defined by structural changes in the economy, such as slow GDP growth, shifting capital investment patterns and low government spending.
  • It’s notable to see the top of a business cycle accompanied by such stable macroeconomic conditions—inflation has remained tranquil despite historically low unemployment.
  • This could be a sign of another Great Moderation, a period of long-term decline in economic volatility as inflation comes under control.

This month, the expansion officially became the longest-running period of sustained US economic growth on record. This longevity is due, largely, to the severity of the Great Recession, which left enough slack in the labor market to require a full decade of above-trend growth to achieve full employment. But today, the economy is in an unprecedented position. The return of full employment has been accompanied by tame inflationary pressure and a lack of financial imbalances.

This unusual stability at the top of the business cycle could signal the reemergence of the Great Moderation, which previously described a period of decreased economic volatility that spanned the mid-1980s to 2007. If so, macroeconomic conditions may be entering a period of low volatility, with growth at sustainable levels and inflation near the Federal Reserve’s 2 percent target.

A Rather Unremarkable Recovery

In many ways, the recovery followed a predictable path. Following the recession, aggregate demand rebounded and unemployment began to fall. New jobs buoyed household income, releasing a surge of pent-up consumer demand that supported stronger retail sales. Businesses and consumers were able to take advantage of low interest rates to make capital investments and big-ticket purchases, and the economy gradually regained its momentum.

However, for many Americans, the recovery has seemed painfully slow. The recession caused so much unemployment that the population of long-term jobless workers has only recently returned to normal levels. Despite this, there has been nothing unusual about the pace of the economic recovery.

Accounting for Unusual GDP Growth

In other ways, the recovery has been unusual. For example, GDP has grown more slowly than in past business cycles, but that is due to structural changes in the economy, not cyclical weakness. The retirement of the baby-boom generation has slowed the expansion of the workforce. A decade ago, the working-age population expanded by a monthly average of 200,000 workers. Today this average has slowed to only around 65,000 workers monthly.

Slower population growth has constrained the economy’s underlying potential to expand because the nation’s productive capacity is determined by the size of its workforce. But by itself, slower growth isn’t harmful to the economy or detrimental to prosperity—what’s important is that the economy is operating near its full potential, giving workers the opportunity for productive employment.

New Sources of Capital Investment

The recovery has also been marked by the shifting mix of capital investment. As mobile commerce and digital services grow in importance, businesses are investing heavily in software and spending less on new structures and equipment. Digital assets depreciate more gradually than physical equipment, so the value of the country’s capital stock has actually reached a historically high proportion of GDP despite a slight decline in capital investment outlays.

Federal Spending Takes a Back Seat

A long-term decline in government spending as a share of GDP has also set this recovery apart from past expansions. The end of the Cold War allowed dramatic cutbacks in defense spending, sending the government’s share of GDP to historically low levels through the 1990s. In 2009, an $800 billion emergency fiscal stimulus measure temporarily reversed this trend, but as the economy gained momentum, government spending receded once again. To an unusual degree, demand from the private sector has driven the later stages of the recovery.

A New View From the Top

As the business cycle approaches its peak, the outlook is far from normal. During past periods of full employment, strong inflationary pressures and massive financial imbalances have emerged to set the stage for a new recession. Nothing similar is happening today. Inflation is running slightly below the Fed’s symmetrical 2 percent target, no speculative asset bubble has begun to inflate and the private sector—not a public subsidy—is bolstering the economy.

If the economy holds the high ground and maintains full employment for some time, it could be a sign of the Great Moderation in action. The taming of double-digit inflation in the 1980s aimed to reduce the volatility of future business cycles—no longer would growth accelerate unsustainably during periods of full employment, leading to overheating and a new downturn.

The economy still faces challenges, including a troubling long-term fiscal deficit, but macroeconomic conditions are unusually tranquil for the top of the business cycle. With no recessionary triggers in sight, the expansion could produce a long period of sustainable growth and full employment, generating a historic period of rising prosperity.

View our economic commentary disclaimer.

Jim Glassman, Head Economist, Commercial Banking

Jim Glassman

Jim Glassman, Head Economist, Commercial Banking

Jim Glassman is the Managing Director and Head Economist for Commercial Banking. From regulations and technology to globalization and consumer habits, Jim's insights are used by companies and industries to help them better understand the changing economy and its impact on their businesses.

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