The silent recovery: how much longer can America’s long, slow boom last?

It all started in the summer of 2009. Barack Obama was six months into his presidency and desperate for some good economic news. The US had just suffered its deepest post-war recession, unemployment was heading for 10% and Washington had been forced to bail out the banks.

But in June of that year, the world’s second-biggest economy turned the corner. A recovery began that has continued uninterrupted ever since. At the end of this month, the US will have enjoyed its second-longest period of economic expansion in history, beating the upswing under John F Kennedy and Lyndon Johnson between 1961 and 1968.

By next summer, if nothing untoward happens, Donald Trump will be able to boast that the US has beaten the record 10-year period of growth between the end of the Gulf war in 1991 and the 2001 dotcom bust. Expect a flurry of self-congratulatory tweets from the White House.

The reasons for America’s recovery are simple. Interest rates were cut quickly and aggressively by the country’s central bank, the Federal Reserve, and kept at rock-bottom levels for seven years. The Fed also pumped trillions of dollars into the economy through the process known as quantitative easing – buying bonds to expand the money supply.

Swift action was taken to clean up the financial system so that the banks could start lending again. Obama announced a modest package of tax cuts and spending increases. Lessons were learned from the mistakes of the Great Depression in the 1930s, when demand was sucked out of an already weak economy and banks were allowed to fail.

Taken together, the measures got the US slowly moving again. It helped that the authorities in Beijing were simultaneously using even more aggressive measures – big infrastructure projects and expansion of credit – to stimulate the Chinese economy.

The subsequent recovery has been long but, by American standards, weak. Traditionally, the US has recovered sharply from downturns and had several years of fast growth. In the 1960s, for example, the US economy grew by 4.9% a year on average while in the 1990s it expanded by 3.6% a year on average. The average during the current expansion is 2.2% and it is the first business cycle since the second world war in which there has not been a single year of growth above 3%.

At 1.4% a year, employment growth has also been modest. America’s hire-and-fire culture has meant workers can be laid off in large numbers during recessions and then taken on again during the subsequent recoveries. In the 1980s upswing, for instance, jobs growth averaged 2.8% a year.

Nor has the recovery followed Kennedy’s dictum that a rising tide should lift all boats. Half of the growth during Obama’s presidency went to the top 1% of US households, with the lack of real income growth for middle America helping to explain both the muted nature of the upswing and the discontent that propelled Trump to the presidency.

Dario Perkins, managing director of global macroeconomics at the research company TS Lombard, says the US is not alone in having experienced a long period of growth. “Among the developed economies, Australia, Sweden, Germany and Canada all have expansions that match or surpass the US achievement. And if we extend the analysis to the emerging economies, we find several countries with even more impressive performances.”

Europe, which suffered a double-dip recession and only began a sustained pick-up in 2013, is the one part of the world where the recovery looks relatively immature, Perkins says.

All upturns come to an end sooner or later and the fact that it is now almost nine years since the US emerged from recession has inevitably led to speculation about when and how the next downturn will arrive.

The International Monetary Fund is worried by Trump’s protectionist rhetoric, with its chief economist, Maurice Obstfeld, warning at its spring meeting earlier this month that there was a risk of the global trading system being torn apart.

Keith Wade, chief economist and strategist at the investment firm Schroders, believes Trump is trying to extract concessions from China before the US midterm elections this November rather than seeking to start a trade war.

Nor does he think there is a high probability of the US being derailed by a hard landing for the Chinese economy caused by the collapse of its credit bubble.

That leaves two remaining triggers. Perkins says that there are only scattered signs of the trends that normally develop in the late stages of an economic cycle – firms running up against capacity constraints, rising inflation and excessive investment. More likely, he thinks, the end will come – as it did in both 2001 and 2007 – with the popping of an asset-price bubble. “Recent history suggests any problems are more likely to start in the financial sector and with central banks tightening policy and asset prices high by historical standards, this is surely the area to watch over the next 12 to 18 months.”

The 1960s upswing eventually came to an end when the economy ran into inflationary problems amplified by the cost of the war in Vietnam and Johnson’s Great Society welfare programmes. Dean Baker, from the left-leaning Centre for Economic Policy Research in Washington, says there is no real evidence that the US economy is reaching its supply limits and that the concerns expressed over the impact of Trump’s tax cuts for the budget deficit are overblown.

But the Fed might see it differently. Wade says the US central bank has a tricky task in raising interest rates without triggering a sharp downturn and that its dilemma is made worse by the fading impact of the fiscal boost after 2019.

The good news for Trump, he says, is that the record for continuous economic expansion will be broken next year. The bad news is that the “festivities in the White House might be somewhat muted as the president faces the prospect of fighting for re-election during a recession”.

Recovery in three charts

The Federal Reserve has struggled to boost prices

Core PCE inflation

US interest rates

2.5%

5%

2.0

4

1.5

3

1.0

2

0.5

1

0.0

0

2006

2008

2010

2012

2014

2016

2018

Source: TS Lombard

The Federal Reserve has struggled to boost prices

Core PCE inflation

US interest rates

2.5%

5%

2.0

4

1.5

3

1.0

2

0.5

1

0.0

0

2006

2008

2010

2012

2014

2016

2018

Source: TS Lombard

The Federal Reserve has struggled to boost prices

Core PCE inflation

US interest rates

2.5%

5%

2.0

4

1.5

3

1.0

2

0.5

1

0.0

0

2006

2008

2010

2012

2014

2016

2018

Source: TS Lombard

The Federal Reserve has struggled to boost prices

Core PCE inflation

US interest rates

2.5%

5%

2.0

4

1.5

3

1.0

2

0.5

1

0.0

0

2006

2008

2010

2012

2014

2016

2018

Source: TS Lombard

Inflation and interest rates

A dramatic cut in interest rates and a $1 trillion government rescue package prevented the US economy falling off a cliff in 2008 and kept inflation from falling below 1%. But efforts to boost inflation back above 2% only achieved momentary success in 2012. Nevertheless, the US central bank, the Federal Reserve, has increased the cost of borrowing four times since 2015 and plans several more rises this year. White House economic advisers expect President Trump’s tax cuts to push GDP growth to 3% in 2018 – but they are a one-off fiscal boost that Fed policymakers are supposed to ignore when making their plans.

The current boom is shown to be weak when compared with recoveries from past recessions

Index over months from recession’s trough (trough = 100)

From 1961

1982

1991

2009

100

110

120

130

140

150

0

15

30

45

60

75

90

Guardian Graphic | Source: TS Lombard

Recoveries compared

It’s clear that the US recovery since 2008 is among the most consistent and sustained, compared with its predecessors. But to say it is lacklustre is to underplay how weak it is, especially when the extra efforts of the government and the central bank are considered. The rapid expansion in the early 1960s during the Kennedy and Johnson presidencies was by far the strongest, followed by the boom under Ronald Reagan, which ended in recession before the recovery credited to Bill Clinton in the 1990s.

Wage increases since 2009 have failed to match those following previous recessions

Annual percentage rise of average hourly earnings for duration of economic recovery

From 1982

1991

2001

2009

1

2

3

4

5%

0 months

30 months

60 months

90 months

Guardian Graphic | Source: TS Lombard

Wages

US wages have waxed and waned during each of the postwar recoveries except for the most recent one, which has seen wage rises remain low for almost the entire period. It was expected that tech giants like Apple, Amazon and Google would spur a turnaround that filtered down to the rest of the economy. However, Amazon and Google, as in the UK, have played a bigger role in boosting transport for their goods and the low-grade jobs that go with the sector, than high-paying engineering jobs in the IT business. Economist Robert J Shapiro says automation in the internet age has been one of the biggest factors depressing wages.

Phillip Inman