Politics & Policy

Expansion, Year Five

Why the bears couldn't see it coming.

Critics who attempt to talk down the U.S. economy do so at their own peril. The ongoing expansion, which began in late 2001 after a brief recession, has survived the September 11 terrorist attacks, corporate scandals, ongoing war, natural disasters like Hurricane Katrina, and an external shock that caused energy commodity prices to double. Yet the economy enters its fifth year of expansion this November, an important development overlooked by the bears whose tea leaves lead them to forever forecast that another downturn is right around the corner.

Bearish critics overlook the dynamic spirit of American capitalism, its risk-taking entrepreneurs, and the economy’s resiliency. They also overlook broad indicators like the output of the nation’s mines, factories, and utilities (industrial production), and nonfarm employment, which both show an economy that keeps on growing.

Industrial production, which reached a trough in November 2001, the month the recession ended, has expanded in 30 subsequent months. Nonfarm employment has expanded by 4.2 million jobs since hitting its trough in May 2003, recording job growth in 27 of the next 28 months. Of these gains, 3.9 million have occurred in private industry sectors.

Expanding production and employment are synonymous with economic expansion, not evidence that another recession is looming.

The horrific September 11 terrorist attacks, in retrospect, did not push the U.S. economy into a deeper recession, although many bearish analysts feared this would be the case. According to the National Bureau of Economic Research, the recession ended a mere 2 months later, and the economy has been growing ever since. Instead of a severe downturn, the “recession lasted 8 months, which is slightly less than average for recessions since World War II.”

The current expansion, now in its 48th month, is longer than six other postwar expansions. These occurred from October 1945 to November 1948, October 1949 to July 1953, May 1954 to August 1957, April 1958 to April 1960, November 1970 to November 1973, and July 1980 to July 1981. Few critics would have forecast that the current expansion would be entering its fifth year even as recently as 2003, when there was exaggerated fussiness about a so-called “double-dip” recession.

Economists who favor exogenous theories for explaining business cycles attempt to draw an analogy between current events and the events of the mid-1970s. Rising oil prices, they argue, are enough to knock the economy into a recession, just like the 17-month contraction in the 1973-75 period.

There are important differences between the two periods. Fiscal policy, in the form of the Bush tax cuts, has been stimulative. Republican President Richard Nixon did not pursue similar fiscal policies prior to or after the 1973-75 recession started, and the Federal Reserve back then did not tighten to bottle-up inflation. Fed policies actually contributed to inflation in the 1970s. By contrast, today’s Federal Open Market Committee has raised the intended fed funds rate 11 times since mid-2003, and appears determined to keep inflation under control.

The consumer price index (CPI) increased 6.2 percent in 1973, 11 percent in 1974, and 9.1 percent in 1975. Today’s inflation rate is tame by comparison, increasing 2.3 percent in 2003 and 2.7 percent in 2004. The CPI has increased 2.4 percent in 2005 through the August reading. The analogy that the economic bears attempt to draw between today’s events and those of the mid-1970s is weak.

One final reason to doubt another recession is imminent: The Treasury yield curve (the difference between long and short interest rates that has long been used as an indicator of economic health) has not inverted — with inversion typically indicative of looming recession. An old trader’s adage advises, “Markets speak louder than politicians.” In this instance, the bond market is not forecasting recession. The yield curve has not inverted, as it did in 2000 prior to the last recession, although the spread between the 90-day T-bill and the 10-year Treasury has narrowed this year.

Contrary to what the bears are telling us, the U.S. economy, about to enter its fifth consecutive year of expansion, should never be underestimated.

–Greg Kaza is executive director of the Arkansas Policy Foundation, an economic research organization based in Little Rock.

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