America’s economic expansion is now the longest on record after celebrating its 10th birthday on July 1. There’s a caveat: it has also been slowest and the smallest.
First, the good news: The expansion that started in 2009 has sent the unemployment rate to a half-century low and inflation is so subdued, Federal Reserve policymakers have said they are not concerned about it – at least, for now. Corporate profits have surged, aided by federal tax cuts at the end of 2017 that sent equity markets to record highs.
But even with that boost from a Republican-controlled Congress, the data shows a lackluster performance for the economy. Skeptics have called the tax changes a sugar rush that mainly benefited the nation’s corporations and its wealthiest citizens while boosting the national debt to a record $22 trillion in the first quarter. There were some cuts for average workers, such as reduced tax rate, but those were made on a temporary basis, while most of the corporate cuts were permanent.
“In the first 39 quarters of the record expansion of 1991-2001, gross domestic product increased 43%,” Bloomberg reported last month. “In the 39 quarters through this March, U.S. GDP grew just 22%. And the sluggish expansion has benefited capital more than labor: Workers’ share of national income has fallen from 68.9% to 66.4% over the period.”
Median household income fell 0.6% to $63,799 in May from the prior month, according to a report by Sentier Research this week. Adjusted for inflation, household income stands 3.4% above the level it was at in 2000.
The lackluster nature of the expansion may also be its protection, said Mark Zandi, chief economist of Moody’s Analytics.
“The key to the expansion’s longevity is two things,” he said in an interview. “First, the economy never boomed, it never really took off, and that has helped because in boom times, people tend to take on too much debt and build too many homes. That's the fodder for recessions.”
One of the drags on over-exuberant growth has been the regulations put in place after the financial collapse that led to the Great Recession, Zandi said. While there has been some roll-back of Dodd-Frank regulations “on the margins,” most of the safeguards are still in place, he said.
“Dodd-Frank required the nation’s systemically important financial institutions to raise more capital, practice more risk management, and regulatory oversight has increased, so it’s much more difficult for these institutions to over-extend credit and make the big mistakes that take out a financial system,” said Zandi. “We’re in a better position because of that.”
There are signs the sugar high from the tax cuts is wearing off. In one report issued this week, the Institute of Supply Management’s manufacturing index dipped to its lowest level since 2016. Another report issued this week was the IHS Markit’s U.S. Manufacturing Purchasing Managers’ Index, showing it at its lowest level in nearly a decade.
Fannie Mae, the largest mortgage financier, is forecasting GDP will slow to 2.1% this year from 3% in 2018. For 2020, the mortgage giant is predicting GDP will be 1.5%, which would be the slowest pace since 2009's contraction.
One report that struck a particularly ominous note with economists was a Federal Reserve study in May that showed about 40% of American adults wouldn't be able to cover a $400 emergency without resorting to credit cards they couldn’t pay off right away.
“It's indicative of the financial fragility of a large chunk of the population,” Zandi said. “Probably half the population is living pretty close to the edge.”