As the current US expansion approaches the previous record (10 years during 1991-2001), there is increased interest in the ascertaining the date of the next recession. In previous posts, I’ve cautioned readers to not assume a recession is inevitable in the next couple of years, despite the previous history of US business cycles. Two facts seem noteworthy:
1. Our expansions have recently been getting longer.
2. Other similar economies such as Australia and the UK have had far longer expansions in recent decades.
I’ve recently become interested in the issue of “soft landings”, the idea of reaching a low unemployment rate and staying there, without triggering high inflation. Can the Fed do it this time, as the UK and Australia recently did?
Of course “soft landing” is a vague concept, so let’s call a soft landing an extended period where unemployment is near the cyclical lows. I’ll define “near” as within one percent of the cyclical low point.
We’ll call this period a “boom”, which is not to be confused with an expansion. For instance, 2010-15 were years of expansion, but not boom. So how long have previous American booms lasted (using my definition)? It turns out that the answer is, on average, 2 years and 4.7 months. Or 2.4 years, if you prefer.
Here’s a graph of the US unemployment rate, with recession periods shown with grey bars:
Starting with the Korean War boom of the early 1950s, the booms lasted for 2.5 years (meaning 2 years 5 months), 2.6 years, 1.1 years, 4.4 years (the 60s and the longest), 1.4 years, 2.1 years, 1.0 years (not really a boom, just an interlude between the 1980 and 1982 recessions), 2.11 years, 3.5 years (the 90s), and 2.10 years (again, 2 years and 10 months).
Unlike with expansions, there’s really not much evidence that booms are getting significantly longer. If we are at the current cyclical low, then the current boom started in November 2016. More likely, the cyclical low for unemployment will end up being closer to the 3.4% of 1969, in which case the boom started in 2017. Thus it’s likely that we are at least 1.5 years into the boom. And booms last about 2.4 years on average. The challenge for the Fed is to keep the boom going, without triggering high inflation.
The current economy probably seems better to the public than to economists, because the public thinks in terms of levels (booms and bad times) whereas economists think in terms of growth rates (expansions and recessions). The job market is not improving more quickly than under Obama, but it’s certainly better—and that’s what people notice (not unreasonably.) Real GDP growth is somewhat quicker.
Speaking of politics, I have a quirky theory that you might be interested in. It’s possible that President Obama’s Iran deal cost Clinton the election, and it’s possible that Trump’s new sanctions on Iran are boosting GDP growth. The Iran deal contributed to sharply higher Iranian oil output, which helped depress global oil prices in 2015-16 (from roughly $100 to roughly $50/barrel.). My quirky hypothesis is that this helped the US economy, but hurt the blue-collar economy of Wisconsin, Michigan and Pennsylvania.
It’s pretty easy to argue that it helped the US economy overall, as real median family income in 2015 and 2016 saw some of the biggest increases in decades, partly due to low inflation caused by falling oil prices. No surprise there. What is a surprise is that these good times were accompanied by a sharp slowdown in RGDP growth, which had been at robust “Trumpian” levels around 2014-15. People forget that. (12-month growth peaked at 3.8% in 2015:Q1, and then fell sharply.) It’s really odd that Americans would do so well during a period like 2016, when RGDP growth was slowing sharply. Why?
Think about the Bastiat “broken window fallacy”. Residents of a country devastated by a hurricane might feel bad, while glass replacement companies in that country might feel pretty good. One problem with my theory is that the low oil prices of 2015-16 would seem to hurt Texas and North Dakota, not the electorally important Midwest. So I decided to look at data on manufacturing employment growth:
Manufacturing employment growth peaked at 1.77% in January 2015, and then plunged into negative territory in the fall of 2016. Hmmm, what else happened in the fall of 2016?
But what does this have to do with the Iran sanctions removal? Recall the subsequent fall in oil prices during 2015-16. With a slight delay, this devastated the US energy industry, just as manufacturing employment was also slowing:
This procyclical pattern is actually pretty weird. In the 1970s, high oil price would have helped Texas and hurt the manufacturing sector, as automakers got crushed. Today, the correlation is positive. Why?
My theory is that America’s manufacturing base has increasingly shifted away from consumer goods, toward bigger capital goods. In addition, we now have a vast fracking sector with a pretty elastic supply curve. In the 1970s, high oil prices just meant more rents for Exxon from its big offshore oil platforms. The rest of the country suffered. Today it means a frenzy of activity in the Permian basin and the Bakkan. As this occurs, manufacturers of capital goods in Wisconsin, Michigan and Pennsylvania ramp up production of steel pipes, pumps, portable generators, and all the other machinery used in the fracking industry. The link between manufacturing and energy has gone from negative to positive.
Just one more of the many lucky breaks that Trump received.
In America’s Electoral College system, the GOP can actually gain from losing a million votes in California and gaining 100,000 votes in the Rust Belt. Trump’s win was partly due to his getting votes in exactly the right places. So you can no longer look at the entire economy, you need to think about the energy/manufacturing nexus. With oil prices once again soaring, this factor again may help the GOP in the midterms, at least in the Rust Belt manufacturing sector. Employment in manufacturing is now growing at more than 2%/year, even higher than the 2015 peak. (So I have more than one data point!) I’m guessing that many of these workers are among the voters who swung toward Trump in 2016, even as he lost votes among well-educated suburban Republicans.
PS. As I said, this post is highly speculative. I’m actually not certain there’s enough construction of energy-related capital goods in the Rust Belt to make this argument work.
PPS. Although I favored Hillary over Trump, I still think the Iran deal was the correct move by Obama. I wish it were still in effect. Furthermore, I have no idea how Trump can justifying cozying up to Kim, even as the North Korean leader insists he won’t give up his nukes, while walking away from an Iran deal that seems to have at least slowed the Iranian development of nukes. If there’s a logical argument there, it’s way over my head.
Update: I probably should have noted that the question of the Iran deal’s role in the 2015 oil price drop is actually much less interesting that the macro implications for the US economy. The US fracking boom also contributed to the price drop. But the new Iran sanctions do seem to have pushed prices back up.
READER COMMENTS
E. Harding
Oct 6 2018 at 3:43pm
“The current economy probably seems better to the public than to economists, because the public thinks in terms of levels (booms and bad times) whereas economists think in terms of growth rates (expansions and recessions).”
Not true (at least, if you want to predict presidential elections using economic indicators).
“My quirky hypothesis is that this helped the US economy, but hurt the blue-collar economy of Wisconsin, Michigan and Pennsylvania.”
Well let’s take a look:
https://fred.stlouisfed.org/graph/?g=luyK
Your hypothesis is surely consistent with North Dakota being the hardest state to swing to Trump (which it was). Manufacturing PA and WI (but not MI, for obvious reasons) seem to have been hurt by the oil price bust more than the nation as a whole.
“So you can no longer look at the entire economy, you need to think about the energy/manufacturing nexus.”
Trump gained everywhere there were non-college Whites, regardless of occupation. In fact, low vocabulary among Whites predicted swing to Trump even more than schooling did (but I think the swing to Trump was mostly due to low “openness to experience” personality than low verbal intelligence, though these are correlated). Economic circumstances below the level of the super-rich (who swung against Trump more than predicted by schooling) did not explain swing against or toward Trump.
“If there’s a logical argument there, it’s way over my head.”
Iran doesn’t have nuclear weapons and there is next to no likelihood it will acquire them over the next several decades (also, the Iranian economy is larger than the Israeli economy; the reverse is true for North v. South Korea). As a result, Iran’s threat to Israel entirely results from its non-nuclear power (which the Iran deal boosts), while North Korea’s threat to the South mostly results from its nuclear power (which the freeze-for-freeze agreement and other North Korea talks reduces). This is simple stuff, Sumner.
Also, it isn’t Trump who creates his own foreign policy; Harvard-educated Mike Pompeo does.
“With oil prices once again soaring, this factor again may help the GOP in the midterms”
The election results that have taken place in WI after Trump’s election (which has had substantially higher manufacturing job growth than the rest of the country since Trump came into office) have mostly been quite poor for the GOP. And, historically, the economy has not mattered for the midterms much (maybe 1934 and 1998 were different, but I think they had much more to do with the incumbent President’s generally high approval rating than the economy). The Dems lost seats in a good economy in 1994 and 2014; the GOP gained seats in a bad economy in 2002 and lost a great deal of perfectly winnable seats seats in a good economy in 2006.
Excellent point and good chart re: manufacturing v. oil and gas jobs:
https://fred.stlouisfed.org/graph/?g=luz7
TMC
Oct 6 2018 at 3:54pm
The Iranian deal was horrendous, not only giving cover to Iran, but helping them pay for their nuclear ambitions. A month after the deal was killed they opened a new centrifuge factory, one that they started building before the deal, and continued to do so in secret. Really the worst of his many foreign policy blunders.
Hillary lost because she took for granted states that democrats have held for a while now. Trump did not.
Scott Sumner
Oct 6 2018 at 4:17pm
TMC, I don’t believe your claims about Iran, unless you can provide a link from a reliable source.
Here’s my source:
https://www.reuters.com/article/us-iran-nuclear-iaea/iran-complying-with-nuclear-deal-but-could-do-better-iaea-idUSKCN1IP2IR
Also, what did the GOP tell us about Iraq’s program back in 2003? How accurate were those claims, compared to the IAEA?
TMC
Oct 6 2018 at 5:54pm
https://www.usatoday.com/story/news/world/2018/06/06/iran-nuclear-facility-opens-within-limits-deal/679410002/ for the Iran claim.
I don’t have any GOP sources, but Bob Woodward seems to: https://www.usnews.com/opinion/blogs/peter-roff/2015/05/26/bob-woodward-bush-didnt-lie-to-start-iraq-war
Scott Sumner
Oct 6 2018 at 6:24pm
TMC, I never said Bush lied about Iraq. Indeed I do not think he did; he was simply wrong. Please do not misrepresent what I say.
And thanks for the Iran link that confirms they are adhering to the deal.
BC
Oct 6 2018 at 8:24pm
“If we are at the current cyclical low, then the current boom started in November 2016. More likely, the cyclical low for unemployment will end up being closer to the 3.4% of 1969, in which case the boom started in 2017.”
If we define booms and “cyclical lows” in hindsight, then won’t that tend to shorten booms? After reaching what we thought at the time was a cyclical low, if unemployment started to rise, then we say that the boom ended pretty quickly. But, if unemployment resumed falling, then we say, “Oops, I guess the boom hadn’t started yet.”
For example, in the mid 90s, it looks like unemployment started leveling off near the previous cyclical low of the late 80s of about 5.5%. If unemployment stayed there until 2001, then we would have said the Fed successfully engineered a soft landing, maintaining a boom for 5-6 years. Instead, unemployment resumed falling for the rest of the 90s, causing us to reclassify the mid 90s from boom to mere expansion, pushing the start of the boom to the late 90s and shortening its length.
Presently, we think we are in a boom based on historical unemployment. However, if unemployment continues falling, then instead of having a longer boom, we’ll end up with a longer expansion but shorter boom that starts later.
TMC
Oct 7 2018 at 1:37pm
My last comment must be in moderation.
I didn’t intent to misrepresent what you meant. Apologies then.
Why would Iran not live up to the deal? It got the best end of it by far. It was a sweet deal for them and all Obama wanted was the appearance of finally getting a foreign policy win before leaving office . 10’s of billions of unfrozen assets plus 1.7 billion in cash. The nuclear program took no hit, and inspections were only given with advanced notice to a limited number of sites. I object to us funding world terrorism.
Sorry to derail the conversation about your larger point, which I mostly agree with. My take is that the economy should have been growing this well all along. Presidents do not have a huge impact on it, but Obama’s regulatory overreach vs Trump’s laissez faire attitude has had at least some effect. Economic sentiment indexes shot up right after the election, before the inauguration.
[N.B. Hi, TMC. I’ve looked through our spam/moderation/trash areas, and it doesn’t look like any of your comments are currently being held up by the spam filter. Feel free to email me at webmaster@econlib.org.–Econlib Ed.]
Lorenzo from Oz
Oct 7 2018 at 7:33pm
My main take away from the Iran deal was that avoiding the Senate was not a “clever” move by the Obama Administration, but a stupid one if they wanted to do more than play politics. No Senate vote meant no commitment by the large US body politic meant the deal got reversed as soon as the GOP occupied the White House.
If it was just (domestic) politics, it makes more sense, but is more contemptible. If it was predicated on Hillary winning it was both stupid and arrogant in operational strategy.
Scott Sumner
Oct 8 2018 at 2:05am
TMC, You said:
“Presidents do not have a huge impact on it, but Obama’s regulatory overreach vs Trump’s laissez faire attitude has had at least some effect.”
Trump certainly does not have a “laissez-faire” approach to economic regulation.
LK Beland
Oct 10 2018 at 11:03am
About the expansion and the boom: one key factor is stability of the growth rate of total nominal wages (i.e. nominal_hourly_wages*hours_per_week*number_employed ). Instabilities–i.e. growth rate above or under trend–is likely what leads to instabilities on the job market. Since Q4 2009, the growth rate of total nominal wages has been remarkably stable. More stable than during any other period where these statistics are available.
https://fred.stlouisfed.org/graph/?g=lxkj
In other words, the Fed is doing a really, really, good job right now, in regards to providing a stable monetary environment for the job market. They need to keep on with the good work and the “boom” will last for a while.
Comments are closed.