An Unusually Balanced US Recovery

January 2, 2018 6:45 AM

Economic expansions come to an end in many ways. Usually they succumb to an unanticipated, adverse shock. Sometimes however, they die from their own dynamics, from imbalances that sustain the expansion but that cannot go on forever: An increasing current account deficit leads to worries about external debt and triggers a sudden stop; a consumption boom naturally comes to an end when consumers have adjusted to their new level of spending; a housing boom turns out to have been excessive, triggering a housing bust.

A balanced expansion is one that eventually undoes the difference in growth rates that took place during the recession and does not create new tensions. One of the striking characteristics of the current US expansion is how balanced it has been, as shown in the two figures below that plot the growth rate of the different components of spending, disaggregating between nonresidential investment, residential investment, consumption, exports, imports, and government spending.

Each figure computes the average growth rate associated with each expansion, starting from the beginning of the recession that preceded it to the beginning of the next recession (or in the case of the current expansion, from the beginning of the last recession (2008Q1) to the most recent observation (2017Q3). An alternative would be to compute average growth rates from the end of the recession to the beginning of the next one. But to the extent that recessions are typically associated with very different growth rates of the various components of demand, such a calculation would be potentially misleading.

The first figure shows the average growth rate using volumes (i.e., deflating the nominal value of each component by its own price deflator), and the second figure shows the average growth rate using real values (i.e., deflating the nominal value of each component by the GDP deflator).

Figure 1 Average growth rate, with demand components, (in volume, i.e. deflated by their own price deflator)

Figure 2. Average growth rate, with demand components, (in real value, i.e. deflated by their own price deflator)

Both figures yield the same conclusion. Compared to the six previous expansions since 1970, this recovery is unusually balanced, with all growth rates within 2.5 percent of each other. Even better, to the extent that there are differences, they reflect a healthy recovery, with export growth at the top, and housing and government spending growth at the bottom.

Such lack of obvious real imbalances is surely no guarantee that there will be no recession soon. Financial imbalances may materialize, although they have not yet done so on a macroeconomically relevant scale. (Note that, from the real values shown in figure 2, the previous recovery, from 2001 to 2007, also looked relatively balanced. But, as we have learned, hiding behind it were serious financial imbalances.) Shocks may come, some of them adverse. But the balanced growth rates are good news nevertheless.

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Olivier Blanchard Senior Research Staff
Colombe Ladreit de Lacharrière Former Research Staff