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A contractor tosses bricks onto scaffolding at a home under construction in Glenelg, Md. last month. The slowly recovering economy is expected to grow for several years.

Slow recovery has an upside

Inflation, debt, employment stats indicate long economic upswing

Bloomberg photos
Job fairs, such as this one in Arlington, Va., are important in what a Stanford professor calls a “very weak” job market.

– The modest pace of the U.S. economic recovery has a silver lining, as the expansion shows signs of lasting almost twice as long as average.

Four years into the upswing, the economy isn’t seeing many of the excesses that often presage the start of contractions. Inflation is slowing, not quickening. Household debt is shrinking, not expanding. The labor market is slack, not tight.

Pent-up demand also bodes well for the longevity of the recovery, which has averaged annual growth of about 2 percent since its start in June 2009. Confronted by elevated unemployment and a depressed housing market, Americans put off forming families, buying homes and acquiring cars.

Now, with house prices rising and payrolls expanding more rapidly, their behavior is changing.

“The current expansion can continue another four to five years,” said Robert Gordon, a professor at Northwestern University in Evanston, Ill., who’s a member of the National Bureau of Economic Research committee that determines when recessions begin and end.

That would make this upswing the second longest on record, behind only the 10-year period that spanned the 1990s. The average since the end of World War II is just shy of five years, at 58 months.

Reflecting the slow, steady pace of the recovery, payrolls rose 175,000 last month, in line with the average over the past year, Labor Department figures released on June 7 showed.

“If the economy keeps expanding for the next three to five years, earnings will go up and the stock market will go up,” said Allen Sinai, chief executive officer of Decision Economics Inc. in New York. He said the Standard & Poor’s 500 Index may rise as high as 1,750 this year and could hit 2,000 in 2015.

Anticipating stronger sales in the years ahead, Ford will add capacity to build 200,000 more vehicles annually in North America on rising demand for F-Series pickups and Fusion sedans, the Dearborn, Mich.-based company said in a May 22 statement.

“The sales and marketing guys are obviously very confident, because they’ve asked for additional capacity, and we’re providing it,” Jim Tetreault, vice president of North America manufacturing, said in a telephone interview.

Economic growth will speed up to 2.9 percent next year and 3.2 percent in 2015, from 1.9 percent this year, according to Goldman Sachs in New York.

“You could have quite a good growth environment for quite a long time,” chief economist Jan Hatzius said in a June 3 Bloomberg Television interview at Goldman Sachs’ Global Macro Conference in London.

While the cyclical outlook looks bright, the United States will be hampered in the longer term by such structural headwinds as an aging population, a plateauing of educational achievement and increased inequality, Gordon said.

A shock also could knock the recovery off course, said Mark Zandi, chief economist at Moody’s Analytics Inc. in West Chester, Pa. Among the possibilities: a collapse of the stock market, a sudden spike in long-term interest rates, or a military confrontation between the U.S. and Iran that drives up oil prices.

While increased domestic energy output has made the U.S. less vulnerable to an oil run-up, the economy would nevertheless take a hit if one occurred, he said.

Policymakers would be hard-pressed to cope with the fallout of a sudden shift, Zandi added. Short-term interest rates controlled by the Federal Reserve already are near zero, and the nation’s budget deficit is still high by historical standards.

The $642 billion shortfall that the Congressional Budget Office sees for 2013 compares with about a $200 billion annual average over the past half century.

Zandi remains upbeat, though: “There are no significant imbalances in the private economy,” he said. “Barring some unforeseen shock, I think we’re in pretty good shape.”

Past expansions often were cut short by the Fed tightening credit. As the economy ran up against capacity constraints and inflation started to rise, policy makers increased interest rates to contain the price pressures, hurting growth in the process.

That’s what happened in 1957, 1960, 1980, 1981 and 1990, Gordon said.

It’s not happening now. This expansion can last because inflation remains low and the central bank continues to stimulate growth, he said.

Consumer prices rose 1.1 percent in April from a year earlier, the smallest increase since 2010, according to Labor Department data.

The Fed currently is buying $85 billion of assets each month in an effort to keep long-term interest rates down. It also has promised to keep short-term rates near zero as long as unemployment remains above 6.5 percent and the outlook for inflation doesn’t exceed 2.5 percent.

Joblessness was 7.6 percent in May, well above the 5 percent mark that prevailed at the start of the last recession in December 2007. High unemployment has held down wage increases, restraining inflation. Average hourly earnings for all employees rose 2 percent last month from a year earlier.

“The labor market is still very weak, with high unemployment and very low participation,” said Robert Hall, an economics professor at Stanford University in California and chairman of the NBER’s recession-dating committee.

“We have a long way to go before any kind of excess will appear in that most important of all markets.”

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