This post by Tim Duy is really a testament to how far standards have been lowered or, you could say, how content some are with the “new normal”. In “The recovery is here to stay”, TD starts off:
A lot of ink has been spilled over the past three years fretting about the fragility of the economy. But the reality is largely the opposite. The economy has proved to be very resilient. We have weathered external demand shocks, external financial crises, and even fiscal contraction, and all the while economic activity continued to grind higher. Looking back, it seems that the biggest risk the economy faced was the Fed’s start/stop approach to quantitative easing. That problem appears solved with open-ended QE linked to economic guideposts.
At the risk of sounding overly optimistic, I am going to go out on a limb: The recovery is here to stay. Not “stay” as in “permanent.” I am not predicting the end of the business cycle. But “stay” until some point after the Federal Reserve begins to raise interest rates, which I don’t expect until 2015. This doesn’t mean you need to be happy about the pace of growth. But it does mean that a US recession in the next three years should be pretty far down on your list of concerns.
It´s less than three months to four years, not just three years! And I don´t understand very well his “…the biggest risk the economy faced…”, because it was the QE´s. even if badly conceived, that got the economy going even if at a rate far short of what was required. TD then goes on to show several pictures of the landscape; industrial production, retail sales, among others. Never mind those because they all mimic the shape of aggregate nominal spending (NGDP) as pictured further down this post.
TD writes on:
As long as the Fed is able and willing to ease in the face of negative shocks – and they have seemed to be willing to do so and have found a solution to the zero bound problem in quantitative easing – I would expect that monetary policy would largely offset most problems that comes down the pipeline.
Case is point is the Asian Financial Crisis. I remember predictions of US recession due to the trade shock, but that never occurred. The Fed eased into the crisis, mitigating its impact. The recession only occurred after the Fed revered course and tightened sufficiently to invert the yield curve. Arguably last summer’s European shock was the same. The Fed met fire with fire, and recession fears faded.
Hear that? The Fed is really a ‘shock offsetting machine’! Only sometimes, or under some leadership, it ‘offsets fully’ but does so only ‘partially’ (and belatedly) at other times, or under ‘new management’. The charts illustrate:
Although he says the “recovery is real” he has some qualms:
Mostly now I concern myself with the pace of growth (still disappointing) and the eventual policy reversal. Similar to Ryan Avent here, I am not convinced that the Fed will be successful in pulling the economy off the zero bound.
Bottom Line: The US economy is less fragile than commonly believed; it has endured a series of shocks over the last three years without major incident. I am claiming neither that equity prices won’t stumble, nor that we should be happy with the pace of activity. But I do think that a recession is unlikely before the Federal Reserve begins raising interest rates – something not likely to happen for two years. While long-run predictions are dangerous, for the sake of argument add up to another two years for tighter policy to reverberate through the economy and you are looking at sometime around 2016/2017 when the next recession hits. That’s the timeframe I am currently thinking about.
Remember that the longest expansion on record was 10 years (1991-01), the second longest was 8 years and 8 months (1961-69) and the third was 7 years and 7 months (1982 – 91). Note that the first and third longest took place during the “Great Moderation” and the second longest during the last half of the “Golden Age”. So saying that this expansion is likely to go on for 7 or 8 years at the same time that it´s unlikely the Fed will be able to pull the economy off the ZLB is a tad optimistic! And even if it goes on for that long there will still be a sizeable gap relatively to what could or should have been!