The good news – and there’s plenty of it – is that the 2019 economy is doing very well. The U.S. economy just notched its 121st consecutive month of expansion. That is, it has been more than a decade since America experienced two consecutive quarters of negative gross domestic product (GDP), which is what defines a recession. That has never happened before. Even the dotcom-fueled, peace dividend-financed expansion of the 1990s petered out after 120 months.
The bad news– and there’s some of that too – is that doesn’t mean this is the strongest economy we’ve ever seen. In the 1990s’ expansion, GDP grew at an overall annualized rate of 3.6%, compared to the current 2.3%. Employment growth then averaged 2.0% per year, compared to today’s 1.4% annualized increase in jobs. By those two metrics, the expansions of the 1950s and ’60s were even more vibrant. Surprisingly – to us more than anyone – the expansion that stretched from March 1975 to January 1980 saw 4.3% annualized GDP growth and 3.6% annualized job growth. We don’t recall the Ford and Carter years that fondly, but those are the numbers.
And therein lies a tale.
Why this time feels good
The difference between now and the late 1970s has nothing to do with GDP or job growth. It has to do with how everyday people experience the economy.
While The Jeffersons were movin’ on up, they were leaving a lot of people behind. It wasn’t that average Americans couldn’t find jobs or that goods weren’t available to satisfy demand. That was all working well. The problem was, while wages were going up 3.6% per year, prices were going up several times that. Inflation never fell below 5% year-over-year and, at its peak, hit 14.6%.
So even though the numbers on the paycheck were getting bigger, the prices at the stores were getting higher faster. The numbers at the gas pump were even worse. Who could afford $1.19 per gallon? Such a gouging!
Another reason why the late 1970s didn’t feel like a recovery is that interest rates were enormous. The fed funds rate is the risk-free interest rate. It’s what the Federal Reserve and the largest banks charge each other for overnight deposits. It’s a fraction of the prime rate, which is the best rate banks will lend to anyone who isn’t a bank. Anything you borrow for – mortgage, car, education, furniture– will be higher than that. The effective fed funds rate at the end of the 1975-1980 expansion was 17.61%. That’s what Chase Manhattan charged Manufacturers Hanover. Today it’s what you pay when you carry a hefty balance on your credit card.
So the current expansion really does feel like an expansion. Not only are there jobs, but inflation and interest rates are also low, and have been for so long that it seems like the natural order of things.
Why this time doesn’t feel good for everyone
Fast-forwarding through an expansion or two, there’s an apocryphal story that President Bill Clinton bragged to a crowd during the 1990s boom times about how many millions of jobs he “created.” A heckler in the crowd, the story goes, shouted out, “I know. I got three of ‘em!”
There’s political hay to be made out of presenting the average American as needing to work multiple jobs to make ends meet. The data don’t back that up, though. Only about 5% of American workers have more than one job – in the formal economy at least – and that number hasn’t changed much over time.
But it is more complicated now with the rise of the gig economy. Nobody knows for sure what proportion of Americans work as contractors instead of on the books as employees, but the numbers seem to coalesce somewhere around one-third. Some of these people, perhaps most, make a decent living, but they are foregoing healthcare insurance, retirement plans and educational benefits that usually go with full-time employment. For them, these are not necessarily the best of times.
This overlaps with underemployment – defined officially in its most narrow form as working part-time but desiring to work full-time. According to the Bureau of Labor Statistics, that’s 2.9%, which is actually a fairly satisfactory number. But Gallup, the polling company, also looks at people who are working full-time but below their skill level, who puts the number at 12.6%. This is a subjective thing, of course.
When stories started appearing about how old this expansion is, it might have taken some people by surprise. It doesn’t seem that old, does it?
Economists often conflate the words “expansion” and “recovery” as they both refer to the time between recessions. The difference is really one of confidence. It’s hard to tell a recovery from a recession when you’re in the middle of it.
The recovery phase was really quite a long slog. It consumed all of President Obama’s first term and much of his second. It’s hard to say at what point – a date in time, an employment milestone reached – the nation regained confidence in its own economic might, but the argument could be made for the third quarter of 2015. That’s the moment when wage growth started to exceed inflation. Average hourly wages, net of inflation, are still rising – but slowly.
Having hit on inflation and interest rates – the twin pickpockets the Fed is charged with policing – we should turn briefly to that other thief in the night, taxes. Although tax policy is generally proposed by the president and is thus closely associated with him, it is actually the purview of Congress.
Not that this distinction matters. The average federal tax rate for all households was 22.4% in 1980. Today – after the Reagan Revolution, the Trump tax reform and all the other changes that came out of the Ways and Means Committee in between, that number hasn’t yet dropped into the teens. Of all the economic factors over the past 40 years, the proportion of our income we give to Uncle Sam looks to be the most constant.
Getting it right from here
Not that consistency is bad. A 10-year expansion – even one that isn’t all that strong on a month-to-month basis – is a good thing. Consistency in economic policy, though, is not a given in 2019.
President Trump made some outstanding nominations for Federal Reserve governorships early in his term. But he has lately been critical of the job they have done so far, despite their role in promoting a generally strong 2019 economy. They recently, in a controversial action, cut interest rates due at least in part to the president’s words and deeds. Only time will tell whether this was the right move or the wrong move. The same could be said about the question of the Fed’s independence. Has the central bank lost its autonomy under Mr. Trump, or did he just reveal to the rest of us that this autonomy was always an illusion?
While we ponder that, it’s best to keep things in perspective. Compared to where the rest of the world is in this moment, the U.S. is certainly the economic envy of all its trading partners.