How Old is Our Economic Expansion?
Our economic expansion started in July 2009, so it's 70 months old and counting. Since the end of World War II, the average expansion has lasted 58 months.
That makes our expansion a whole year older than average. Is ours an elderly expansion, about to enter the December of its years? Are its days numbered?
The economies of the 1940s through the 1970s don't have much do with us. In the 1940s and '50s, the manufacturing-heavy U.S. economy reigned supreme in the
post-war world. In the 1960s and '70s, inflation rose to double digits with war, oil price hikes and bad policy choices. We shouldn't measure today's
expansion against economies so different from ours.
Instead, let's compare to the expansions since the 1980s. There have been three, and they lasted an average of 95 months. By that measure our 70-month-old
expansion is still young – two years younger than average. Barely middle-aged.
Here's what we expect as expansions get older. The labor market nears full employment, so there are fewer unemployed people searching for work. Growth then
depends on new workers entering the labor force as they graduate from high school or college. Growth slows down a bit.
With fewer people searching for work, businesses that want to expand have to offer higher wages and benefits to attract employees from other firms, or get
people to leave home, school or retirement. The higher costs of doing business begin to increase the inflation rate.
Expanding businesses want to borrow more money, so banks begin to raise interest rates. And the Federal Reserve sees inflation rising, or worries that it
might rise, so it pushes interest rates higher, too.
How does our expansion compare to this story? We're barely there. Growth has been slow, but it doesn't seem to have slowed from its post-recession pace
yet. The unemployment rate is down to 5 percent, but we suspect that there are a large number of workers who could enter the labor force if the
opportunities were there. Wages may be starting to rise, but they haven't increased very much.
If we ignore the effects of oil prices, the "core" inflation rate has reached 2 percent. That's the Federal Reserve's target rate. So the Fed increased its
federal funds interest rate by a quarter point back in December and may hike rates a little more over the next year.
Our expansion isn't that old and doesn't show many signs of aging. And besides, expansions usually don't die from old age; they die from shocks.
The 1980s' expansion ended when the savings and loan crisis reduced lending, the Fed hiked interest rates to hold down inflation, and then the Gulf War
began. At the end of the 1990s' expansion we saw a rise in oil prices, a rise in interest rates, and the crash of the dot-com boom. But it took the tragedy
of 9/11 to cause a recession, with the disruptions to financial markets and travel. The 2000s' expansion ended with the real estate bust and the collapse
of the financial structure built on sub-prime mortgages.
Are there any shocks like this on the horizon that could end our barely middle-aged expansion? That's a silly question. They're called "shocks" because
they're unanticipated. We won't know what they are until they happen.
But oil and China seem to be the two shocks-in-waiting. Low oil prices help consumers, but they hurt oil producers, and the U.S. is a big oil producer now.
A lot of investments in U.S. oil were made back when oil prices were high. Now prices are low, and many of those investments look bad.
China's growth has slowed, so exports to China are down. That has weakened economies all over the world, but the bigger worry is in financial markets. If
loans to companies doing business in China aren't repaid or the Chinese currency crashes, financial markets could be in trouble.
Expansions may be more vulnerable to shocks as they age, with tighter credit and slower growth. Our expansion doesn't show many signs of aging. And the
last three expansions died from shocks, not old age. Unless we see a couple of pretty severe shocks, our expansion should be good for a few more years.