U.S. Expansion Poised for Longevity
The modest pace of the U.S. economic recovery has a silver lining, as the expansion shows signs of lasting almost twice as long as average.
Four years into the upswing, the economy isn’t seeing many of the excesses that often presage the start of contractions. Inflation is slowing, not quickening. Household debt is shrinking, not expanding. The labor market is slack, not tight.
Pent-up demand also bodes well for the longevity of the recovery, which has averaged annual growth of about 2 percent since its start in June 2009. Confronted by elevated unemployment and a depressed housing market, Americans put off forming families, buying homes and acquiring cars. Now, with house prices rising and payrolls expanding more rapidly, their behavior is changing.
“The current expansion can continue another four to five years,” said Robert Gordon, a professor at Northwestern University in Evanston, Illinois, who’s a member of the National Bureau of Economic Research committee that determines when recessions begin and end.
That would make this upswing the second longest on record, behind only the 10-year period that spanned the 1990s. The average since the end of World War II is just shy of five years, at 58 months.
Reflecting the slow, steady pace of the recovery, payrolls rose 175,000 last month, in line with the average over the past year, Labor Department figures released on June 7 showed.
“If the economy keeps expanding for the next three to five years, earnings will go up and the stock market will go up,” said Allen Sinai, chief executive officer of Decision Economics Inc. in New York. He said the Standard & Poor’s 500 Index may rise as high as 1,750 later this year and could hit 2,000 in 2015. The stocks benchmark was at 1,643.38 at 4 p.m. on June 7.
Anticipating stronger sales in the years ahead, Ford Motor Co. will add capacity to build 200,000 more vehicles annually in North America on rising demand for F-Series pickups and Fusion sedans, the Dearborn, Michigan-based company said in a May 22 statement.
“The sales and marketing guys are obviously very confident, because they’ve asked for additional capacity and we’re providing it,” Jim Tetreault, vice president of North America manufacturing, said in a telephone interview.
Economic growth will speed up to 2.9 percent next year and 3.2 percent in 2015, from 1.9 percent this year, according to Goldman Sachs Group Inc. in New York.
“You could have quite a good growth environment for quite a long time,” chief economist Jan Hatzius said in a June 3 Bloomberg Television interview at Goldman Sachs’s Global Macro Conference in London.
U.S. stocks fluctuated between gains and losses after Standard & Poor’s raised to stable from negative the U.S.’s AA+ credit-rating outlook. The S&P 500 Index declined 0.2 percent to 1,640.40 at 10:16 a.m. in New York. The index is up about 15 percent this year. The yield on the benchmark 10-year Treasury note increased two basis points, or 0.02 percentage point, to 2.19 percent, according to Bloomberg Bond Trader prices.
Elsewhere today, Italy’s economy shrank more than initially reported in the first quarter and French industrial confidence stalled in May as the euro area struggled to emerge from a record-long recession.
Italian gross domestic product fell 0.6 percent from the previous three months, the Rome-based National Statistics Institute said, after a May 15 estimate of a 0.5 percent drop. A French index of sentiment among factory managers was unchanged at 94, while an index of service companies fell to 88 from 89, according to the Bank of France.
Japan’s economy grew more than the government initially estimated in the first quarter, another report showed, helping Prime Minister Shinzo Abe to sustain confidence in his campaign to defeat deflation. GDP expanded an annualized 4.1 percent, compared with a preliminary calculation of 3.5 percent, the Cabinet Office said in Tokyo.
While the cyclical outlook for the U.S. looks bright, the nation’s economy will be hampered in the longer term by such structural headwinds as an aging population, a plateauing of educational achievement and increased inequality, Gordon said.
A shock also could knock the recovery off course, said Mark Zandi, chief economist at Moody’s Analytics Inc. in West Chester, Pennsylvania. Among the possibilities: a collapse of the stock market, a sudden spike in long-term interest rates or a military confrontation between the U.S. and Iran that drives up oil prices. While increased domestic energy output has made the U.S. less vulnerable to an oil run-up, the economy would nevertheless take a hit if one occurred, he said.
Policy makers would be hard-pressed to cope with the fallout of a sudden shift, Zandi added. Short-term interest rates controlled by the Federal Reserve already are near zero, and the nation’s budget deficit is still high by historical standards. The $642 billion shortfall that the Congressional Budget Office sees for 2013 compares with about a $200 billion annual average over the past half century.
Zandi remains upbeat, though: “There are no significant imbalances in the private economy,” he said. “Barring some unforeseen shock, I think we’re in pretty good shape.”
Past expansions often were cut short by the Fed tightening credit. As the economy ran up against capacity constraints and inflation started to rise, policy makers increased interest rates to contain the price pressures, hurting growth in the process. That’s what happened in 1957, 1960, 1980, 1981 and 1990, Gordon said.
It’s not happening now. This expansion can last because inflation remains low and the central bank continues to stimulate growth, he said. Consumer prices rose 1.1 percent in April from a year earlier, the smallest increase since 2010, according to Labor Department data.
The Fed currently is buying $85 billion of assets each month in an effort to keep long-term interest rates down. It also has promised to keep short-term rates near zero as long as unemployment remains above 6.5 percent and the outlook for inflation doesn’t exceed 2.5 percent.
Joblessness was 7.6 percent in May, well above the 5 percent mark that prevailed at the start of the last recession in December 2007. High unemployment has held down wage increases, restraining inflation. Average hourly earnings for all employees rose 2 percent last month from a year earlier.
“The labor market is still very weak, with high unemployment and very low participation,” said Robert Hall, an economics professor at Stanford University in California and chairman of the NBER’s recession-dating committee. “We have a long way to go before any kind of excess will appear in that most important of all markets.”
There’s also scant sign the private sector is borrowing too much and becoming overextended, Zandi said. Household debt fell 1 percent in the first quarter to $11.2 trillion, “considerably below” the peak of $12.7 trillion set in 2008, the Federal Reserve Bank of New York said in a May 14 report.
“Many previous cycles have ended because of overbuilding - - too much exuberance in both residential and nonresidential construction,” Gordon said. “This was a major cause of the 1929-33 Depression and also what happened in 2007-08.
“We certainly haven’t had overbuilding during 2008-13,” he added. “Rather the contrary.” The U.S. is “constructing fewer homes and cars than replacement needs.”
Joe Pimentel, general manager for Volmaz, a Decatur, Georgia, repair shop that works on imported models, sees this first hand.
“Yesterday we had in a 1992 Volvo 940 that had 330,000 miles on it,” he said in an interview on May 29. “We are seeing older and older cars coming in.”
Pimentel, 48, said he sometimes urges customers “to go out and go get something else” rather than keep putting money into repairs. “Older cars are not going to last forever. There is a law of diminishing returns. That is a conversation I probably have four or five times a week.”
“Consumers have really been deferring purchases,” he said. “We are still very early in the U.S. auto-sales cycle.” He forecasts sales of cars and light-duty trucks will rise to 16.5 million in 2015 from 14.5 million last year.
The economy also may be fired up by a rush of household formation, unleashing pent-up demand for everything from homes to weddings, Maury Harris, chief economist at UBS Securities LLC in New York, said. Younger adults have the most ability to spend after some delayed striking out on their own by living with parents or friends.
Housing starts could improve to 1.1 million units this year and 1.35 million in 2014, according to calculations by Harris and his fellow UBS economists, compared with 781,000 in 2012.
“There are a lot of positive things taking place,” said Joseph Carson, director of global economic research at New York-based AllianceBernstein LP, which has $453 billion in assets under management. “We have another three to four years of economic growth at least.”
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