“US ECONOMY MAY BE STUCK IN SLOW LANE FOR LONG RUN”:

In the 4 1/2 years since the Great Recession ended, millions of Americans who have gone without jobs or raises have found themselves wondering something about the economic recovery: Is this as good as it gets? It increasingly looks that way. History suggests that economies that seem doomed can sometimes enjoy sudden turnarounds and unexpected bursts of energy. American consumers were walloped by high gasoline prices and low growth in the 1970s. Yet the feared downward spiral never happened as the economy roared through the 1980s. “Financial crises do not last forever,” Reinhart said. “A decade is a long time. But a long time is not the same as forever.”

Unfortunately, for many a decade can turn into “forever”!

The charts below take a 140 years view of the US economy – real output relative to trend and inflation (CPI).

Notice that there is one real output trend over the whole period and that, with few exceptions, real output ‘hugs’ the trend. Inflation is a different matter, varying quite a bit.

To put the recent period in perspective, I break down the whole period into a few sections.

The first covers the period around the Great Depression. Note that four years after the start of the depression in 1929, real output begins to move towards the trend. That´s aborted temporarily in 1937, but by the eve of WW-II, real output is back close to trend. From averaging zero, inflation turns into deflation in the early 30s (they had no ‘Helicopter Ben’ in those days).

The Kennedy economist´s obsession with unemployment pushed real output above trend. The ‘price’ of low unemployment was rising inflation. For a short time after the first oil shock both inflation and unemployment were on the rise.

During the “Great Moderation” output remains close to trend and inflation is low and stable (unemployment is also mostly low).

And the “Great Recession” is a new experience, at least for most of us that did not experience the “Great Depression”. The economy is growing but remains depressed! Is that “as good as it gets”? Even considering that the trend level may have come down somewhat (maybe due to demographic factors), output is still too low and shows no indication of wanting to get back to (a new lower) trend. The economy may not only be “stuck in the slow lane” but even worse, also in the “low lane”.

As the saying goes, beware what you wish for because that´s exactly what you may get!