This article is from Dollars & Sense: Real World Economics, available at http://www.dollarsandsense.org
This article is from the
May/June 2019 issue.
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Why Has the U.S. Economy Been Doing So Well?
Dear Dr. Dollar:
Why has the U.S. economy been doing so well?
—Anonymous, via email
This question immediately invites a couple of additional questions: What does it mean to say the economy has been “doing so well”? And: Has the U.S. economy really been doing so well?
Long and Slow
The most widely used measure of how well an economy is doing is the growth of gross domestic product (GDP). On the one hand, GDP has been growing for an unusually long time. Since the economic expansion began in June of 2009, it has continued for 118 months, as of April 2019. If the expansion continues into the summer, it will surpass the longest expansion on record, which lasted for 120 months in the 1990s.
On the other hand, it has been an historically slow expansion, with GDP averaging about 2.24% per year. In the two years since Trump took office, GDP grew 2.22% in 2017 and 2.86% in 2018, the latter almost as fast as the 2.88% in 2015. This is quite slow compared to the 3.6% rate in the 1990s, and the 4.8% rate in the 106-month expansion of the 1960s. (All figures are adjusted for inflation.) It is remarkable that, in spite of this comparison with the rates of growth in other long expansions, media reports frequently refer to the economy as “roaring” or “sizzling.”
The employment situation also has its positive and negative aspects. On the one hand, the unemployment rate has fallen almost steadily since its 2009 peak at 10% during the Great Recession. And the rate has been at the historically unusual rate of less than 4% for the past year. Relatively few people who want jobs are unable to get them. On the other hand, in spite of the low unemployment rate, wages have risen quite slowly. Between mid-2009 and today, the average hourly rate for all private employees on private payrolls has gone up by only slightly over 4%; about half of that increase has come in the last two years.
Even with many more people employed than at the time of the Great Recession, the very slow increase in wages has meant a rise in income inequality. In 2007, the average income of households in the top 5% was 25 times as great as the average income of households in the bottom 20%. By 2017, the average income in the top 5% was 29 times that in the bottom 20%. (These figures are for pre-tax income. The after tax distribution was slightly less unequal, but changed in the same way. Moreover, the tax cut at the end of 2017 surely has made the after-tax distribution of income more unequal.)
Perhaps the combination of the slow increase of GDP and the rising income inequality can be summarized as: The economy is doing well, but the people aren’t.
What Keeps the GDP Growing?
In the spring of 2019 it appears that the growth of GDP is slowing. Still, even if the economy tanks soon, the current expansion will be the longest on record. A record requires some explanation. Part of the explanation, ironically, is that the expansion has been so long because it has been so slow. Because growth was slow and the unemployment rate, while falling, came down slowly, wages have risen very slowly. This limited the extent to which wage costs were cutting into firms’ profits.
Another factor, also easing cost pressures on profits, was that commodity prices fell and remained low—that is, prices of basic raw materials, everything from copper and oil to soy beans and corn. In 2017, the Bloomberg index of commodity prices was only 43% of its 2011 peak. While it has gone up and down in recent months, at the beginning of April 2019 the index was still only 46% of its 2011 high. These price changes were partly affected by the large increase of U.S. production of oil, but also by the slowdown in the growth of demand in the United States, relative stagnation in Europe, and even weakening of the Chinese economy. Still another factor keeping businesses’ costs down and the recovery growing, however slowly, was the low interest rate policy of the U.S. Federal Reserve. From the Great Recession until 2018, the real interest rate at which banks could borrow was effectively zero, or even negative. (The “real” interest rate is the nominal rate less the anticipated inflation rate.)
These factors affecting firms’ costs kept the economy growing. However, the government provided only limited stimulus to demand, so the growth has been slow. The federal government provided some stimulus in the American Recovery and Reinvestment Act of early 2009. The Act did help boost the economy out of the recession, but was neither large enough nor lasting enough to sustain strong growth in subsequent years.
Now and Going Forward
The large tax cuts put in place by the Republicans at the end of 2017 do appear to have had some stimulatory impact, as people spent the gain they received. But the tax cut greatly favored the very rich, and the rich tend not to spend at a high rate. So the growth impact was limited. Also, while the Republicans promised that the tax cut for corporations would lead to a surge of investment, the surge never materialized. Instead, major corporations used their windfalls from the tax cut to buy back large amounts of their stock, an action which enhanced the incomes of their executives and other stockholders, but has had created no lasting stimulus for the overall economy.
Then there is the developing trade war with China. All indications are that this conflict will not be resolved soon and will have a negative impact on economic growth—not only on the U.S. and China, but possibly on the global economy.
We are left, then, in early 2019, with an impending economic slowdown of an already slowly growing economy. While many things can happen in the coming months, it is unlikely that a year from now anyone will be asking, “Why has the U.S. economy been doing so well?”
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