Why this US economic recovery has been different, in one chart

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  • The current US economic expansion is the second-longest since the end of World War 2.
  • Ultra-easy monetary policy settings are a major factor behind the length of the recovery.
  • Some are speculating that the current length, at a time when the US yield curve is flattening, points to the likelihood that the next downturn is not all that far away.

The current US economic expansion is the second-longest since the end of World War 2.

In broad terms, the recovery has been both modest and long, reflecting just how severe the global financial crisis was.

Given how long the current expansion has been, there’s understandably been some speculation about when it will end.

It is, after all, getting closer to being unprecedented in the post-war era.

And the US yield curve — the differential between long and short-term interest rates — is also getting narrower, and could potentially turn negative in the not too distant future, something that has almost always signalled that recession is on the horizon.

While no one knows when the next recession will hit, the chart below from the National Australia Bank (NAB) is informative.

It shows the level of the real Fed funds rate — simply the nominal rate less inflation — over all the US economic expansions seen since the 1960’s.

NAB

This expansion has been different to most others with real interest rates sitting in negative territory for much of the past decade, only lifting into positive territory in recent years as the Fed increased rates.

While this doesn’t take into consideration the change in outstanding debt levels, and therefore servicing costs, the real Fed funds rate currently sits well below the levels that coincided with economic downturns in the past.

Put bluntly, real policy settings are still stimulatory, albeit not as much as they were earlier in the cycle.

In the NAB’s opinion, while there are risks out there for current expansion, that doesn’t mean it will end shortly simply because it’s been lengthy.

“Growth cycles typically end when economic and financial imbalances become large,” it says.

“The most common imbalances over the past fifty years have been inflation rising too quickly and central banks over-tightening, asset bubbles bursting and Emerging Market countries suffering capital flight.

“There are risks to any outlook, and it is surely true that there will be a global recession again one day, but there is as yet no hard evidence this is more likely to occur in 2019 than 2025.”

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