The Long, Slow, but Still-Going Recovery

Growth is mediocre, but there’s no sign of overheating in any market | “The current expansion could go on another four or five years”

Rich Miller and Steve Matthews

How This Recovery Stacks Up


There’s a lot to complain about when it comes to the U.S. recovery. Unemployment isn’t falling fast enough or far enough. Manufacturing is weak. Gross domestic product is expanding at a modest 2 percent clip. Yet this recovery has one advantage: It keeps going. “The current expansion can continue another four to five years,” says Robert Gordon, a professor at Northwestern University and 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 recovery since the end of World War II is 58 months.

Four years into the upswing, the economy isn’t seeing the excesses that often trigger a contraction. Inflation is slowing, not quickening. Household debt is shrinking, not expanding. The labor market is slack, not tight. Pent-up demand bodes well for the longevity of the recovery. Confronted with high unemployment and a depressed housing market, Americans have put off forming families, buying homes, and acquiring cars. Now, with house prices rising and payrolls expanding more rapidly, their behavior is changing.

Anticipating stronger sales in the years ahead, Ford Motor will add capacity to build 200,000 more vehicles annually in North America because of rising demand for F-Series pickups and Fusion sedans, according to a May 22 company release. “The sales and marketing guys are obviously very confident,” says James Tetreault, vice president of North America manufacturing. Economic growth will speed up to 2.9 percent next year and 3.2 percent in 2015, from 1.9 percent in 2013, according to Goldman Sachs. “You could have quite a good growth environment for quite a long time,” says its chief economist, Jan Hatzius.

A shock could send the recovery off course, says Mark Zandi, chief economist at Moody’s Analytics. Among the possibilities are a stock market collapse, 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 runup, the economy would nevertheless take a hit if war broke out. Policymakers would be hard-pressed to cope with a sudden shift in the economic landscape because short-term interest rates already are near zero and the nation’s budget deficit is still high by historical standards.

Still, Zandi remains upbeat. “There are no significant imbalances in the private economy,” he says. “Barring some unforeseen shock, I think we’re in pretty good shape.” Past expansions were often cut short by the Federal Reserve tightening credit. As the economy began to overheat and inflation rose, policymakers increased interest rates to contain the price pressures, hurting growth in the process. That’s what happened in 1957, 1960, 1980, 1981, and 1990. In this expansion, inflation remains low and the central bank continues to stimulate growth. Consumer prices rose 1.1 percent in April from a year earlier, the smallest increase since 2010, according to U.S. Department of Labor data.

The Fed is buying $85 billion of assets each month to keep long-term interest rates down. It 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. 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,” says Robert Hall, an economics professor at Stanford University 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.”

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 reported on May 14. “Many previous cycles have ended because of overbuilding — too much exuberance in construction,” Gordon says. “We certainly haven’t had overbuilding during 2008-13.” The U.S. is “constructing fewer homes and cars than replacement needs.”

Joe Pimentel, general manager for Volmaz, a Decatur (Ga.) car repair shop for imports, sees this firsthand. “We had in a 1992 Volvo 940 that had 330,000 miles on it,” he says. “We are seeing older and older cars coming in.” Pimentel says he sometimes urges customers “to 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,” he says. Such postponed buying has Itay Michaeli, an analyst with Citigroup, recommending the shares of Ford and General Motors. “Consumers have really been deferring purchases,” he says.

The economy may also get 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, says. Younger adults have the greatest ability to spend after many postponed striking out on their own and elected to live with parents or friends instead. Housing starts could improve to 1.1 million this year and 1.35 million in 2014, according to calculations by Harris and other UBS economists. Says Joseph Carson, director of global economic research at money manager AllianceBernstein: “There are a lot of positive things taking place.”

The bottom line With household debt down $1.5 trillion and inflation up only 1.1 percent, the recovery seems to be on solid footing.


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