Macro Weekly – Will this US expansion break records for length?

by: Han de Jong

  • Current US upswing is third longest on record
  • Chances that it will become the longest on record are encouraging
  • Better slow, but lasting than furious, but short
  • Biggest risks are international risks
Macro-Weekly-5-May-2017.pdf (150 KB)

The current US economic upswing started in the middle 2009 according to the NBER cycle-dating committee. The economy will inevitably hit a recession some time. As the last recession is already a long time behind us, economists regularly raise the question how much longer this upturn can last. In this comment, I look at the history of post-WWII US recessions. I conclude that there is a decent chance this upturn will become the longest on record.

This is already the third longest upturn on record

Since the end of the Second World War (WWII), the US economy has experienced 11 recessions. The most recent recession was the deepest in terms of lost GDP. The current phase of economic growth started in July 2009 and is the third longest recovery period since records began 150 years ago. The upswing is now 94 months old and counting.

Since WWII upswings have lasted some 59 months on average. Over the whole period covered by the NBER data, going back to 1854, upswings have lasted some 39 months on average. Interestingly, the NBER provides numbers for sub-periods. Between the start of the data and 1919, recovery periods averaged only 27 months, while recessions lasted 22 months. I find that an interesting observation as some commentators today argue that we should go back to a monetary system like we had in the second half of the 19th century. Between the wars, an upswing lasted 35 months on average, and, as said above, since WWII it is 59 months.

The longest period on record without a US recession lasted 120 months, from April 1991 until March 2001. The second longest took place between March 1961 and December 1969, lasting 106 months. It will take another 12 months for the current upswing to equal the latter, while economic growth should continue for another 27 months to make the current recovery the longest on record. That is not impossible.

How deep are recessions and how strong recoveries?

Recessions differ in cause, length and depth. To keep things simple, the graph below measures the drop in real GDP associated with the recessions since WWII and the rise in unemployment. It is clear that the most recent recession has been the deepest since WWII.

The table below measures the average quarterly (annualised) GDP growth rate during recovery phases. As a change of population growth can vary materially over time, the table also provides data on population growth. The lower population growth, the more acceptable it is when GDP growth is lower. It is clear that the current upswing has been the most muted since WWII and that the slower pace cannot be fully explained by weaker population growth. But the table also makes clear that the strength of recoveries has generally declined in recent cycles, it is not new to the current cycle.

What causes recessions? [1]

A recession is a drop in output. It can be caused by a drop in demand or by supply disruptions. Most recessions are caused by a drop in demand. This, in turn, can happen as a consequence of a variety of factors.

The recession of ‘48/’49 was caused by a drop in demand associated with the end of WWII and an adjustment to peace-time production. The recession of ‘53/’54 was mainly associated with the end of the Korean war.

The recession of ‘57/’58 was caused by a strong rise in inflation from -0.7% in 1955 to almost 4% early 1957 and the Fed’s contractionary policy in response. It is not clear to me what caused the ‘60/’61 recession, but, according to vice-president Richard Nixon, it cost him the presidential elections to JFK. I am afraid it is also not clear to me what caused the ‘69/’70 recession.

The long and painful recession of ‘73/’75 was caused by a number of factors. Of course, the trebling of the oil price caused a significant economic downturn. In addition, the end to the gold standard in 1971 may have contributed to the rise in inflation due to weakened monetary discipline. Inflation was only 2.7% in the middle of 1972, but rose to 12.3% in the course of 1974. Monetary policy responded with a similar increase in official rates. The rise in inflation clearly eroded spending power and distorted the economy. On top of this, President Nixon responded to the rise in inflation by wage-and-price controls (against the explicit advice of the then White House advisor Alan Greenspan). These controls were a shock to the demand and the supply side of the economy.

The period 1980-1982 were characterised by two recessions in quick succession. They were the iconic ‘Volcker recessions’, largely caused by the Fed, under the chairmanship of Paul Volcker, when they tried to stamp out inflation and inflation expectations. Their efforts were successful, but came at a high price. Inflation had run up to almost 15% early 1980 to which the Fed responded by raising its key Fed Funds rate to 20%. A recovery followed as the Fed then lowered rates quickly to 9.5% by mid-1980, but rates were quickly on the up again, reaching 18% late 1980 and 20% again by mid-1981. One of the causes for higher inflation was the sharp rise in oil prices and the Iranian oil embargo which limited oil supplies in the US.

The recession of ‘90/’91 was most likely caused by a combination of the rise in oil prices following the Gulf war in response to Iraq’s invasion of Kuwait as well as a credit crunch resulting from the savings and loans crisis.

The recession of 2001 was caused by the implosion of the internet bubble on the stock market and a drop of IT spending after Y2K.

The recession of 2007 was clearly caused by the bursting of the credit bubble and the related bursting of various asset bubbles, leading to huge problems among banks.

A summary of causes

Looking at the post-WWII history, the following possible causes for recessions can, tentatively, be listed:
• Reduction of military spending
• A sharp deterioration in the terms of trade (rising oil prices)
• A rapid rise in inflation eroding real spending power
• Aggressive monetary policy to kill inflation
• Bursting asset bubbles leading to negative wealth effects and a credit crunch

It is probably also important to note the importance of the profit cycle. A sharp decline in corporate profits leads to a sharp decline in investment. Declining profits play a role in most recessions, though it is not clear to what extent they are a trigger or a first consequence, adding to the momentum of a downturn.

What are the chances of a recession now?

Looking at the list of factors usually causing a recession, I think the outlook for the next 12 months is very positive and the outlook for the next 24 months is encouraging.

A large drop in military spending is clearly not going to happen. A dramatic rise in oil prices does not look very likely either. Inflation may rise a little, but not enough to cause a material drain on real spending power or an overly aggressive reaction from the Fed. Asset prices are clearly high, but they do not look overextended to the degree that sharp falls with associated negative wealth effects have a high probability. And capital ratios of banks are higher than they have been for years, so a credit crunch would also appear to be unlikely. Corporate profits are high, but it looks like they are strengthening at the moment.

My guess is that this US upturn could easily become the longest on record. Admitted, the average growth rate during this upswing is the weakest since WWII. But it is probably better to have a long and modest recovery than a short fast one.

The biggest risks come from the international environment in my opinion. The risk with the highest probability is that Chinese growth slows more than expected as Chinese policymakers are trying to address a number of domestic economic and financial challenges. Chinese policymakers have an impressive record when it comes to macro-management and have lifted hundreds of million people out of poverty in the last couple of decades. Other countries have benefitted as well. But it remains possible that they step on the brakes too forcefully. That would end the impressive strengthening of world trade growth currently underway and lead to a reversal of the recent gain in global economic momentum. In contrast to most of the history since WWII, China is now a decisive factor in the world economy, also for the US.

[1] This section is based on a quick scan of a limited number of relevant economic indicators and on “The History of Recessions in the United States”, last updated 2 May 2017 on You must bear in mind that this is not an exact science.