US economic expansion strongest since Korean war
Boston — Federal Reserve economist Stephen K. McNees has done what might be called a ``personality analysis'' of the current economic expansion. After a deep recession, the United States economy began expanding again in December 1982. The expansion is now 26 months old. It, like other recoveries, has developed its own individuality.
Here are some characteristics noted by McNees:
It is the strongest expansion since the Korean war boom. The output of goods and services (real gross national product) had grown 12.6 percent at the end of 1984 (eight quarters of expansion). That compares with an average 10.5 percent for the first eight quarters of expansions that began in 1954, 1958, 1961, 1970, and 1975. (Mr. McNees excludes the 1980 expansion from the average because it was too brief to be comparable.)
If measured by ``real expenditures,'' the recovery has been even stronger. Real expenditures -- total purchases by consumers, business, and government adjusted for inflation -- were up 15.1 percent. That is well above the 11.1 percent average of the five other recoveries. Since GNP measures domestic production, this difference reflects the boom in imports.
The growth in consumer spending has been ordinary in this expansion. Real personal consumption expenditures were up 10.1 percent, compared with the average of 10.4 percent.
What has boomed is all types of investment.
Gross private domestic investment has soared 62.4 percent in the first eight quarters of today's recovery. The average gain for two years in five earlier expansions was 30.6 percent.
Profits also have soared about 50 percent more than average in this recovery. Real residential investment is up 46.5 percent, well above the 28.5 percent average.
Mr. McNees says one factor behind the investment boom is the Accelerated Cost Recovery System enacted in 1981 tax legislation.
Rapid economic growth has also pushed up employment slightly faster than usual. It has risen 6.5 percent in the first two years of this expansion, compared with an average of 5 percent.
Productivity in the nonfarm business sector has climbed 6.4 percent in the first two years, slightly less than the average 6.7 percent.
Productivity is highly cyclical in nature, rising rapidly in a recovery and slowing down or sinking in a recession. Mr. McNees figures it is too early in the recovery to be sure that productivity has returned to a more normal level from a bad slump in the late 1970s and early 1980s.
One factor behind the strong recovery has been a rapid growth in the nation's money supply.
In the first two years of this cycle, money (checkable accounts plus currency) has grown 16.3 percent, compared with 8.2 percent on average.
This rapid money expansion has prompted some economists of the monetarist school to predict a speedup in inflation. But McNees reckons that part of the rapid growth may be explained by the deregulation of banking and the creation of money market accounts and super-NOWs. Thus this portion of the new money may not feed into higher prices with the usual lag of about two years. So far, in any case, inflation has remained moderate by today's standards.
By comparing today's expansion with earlier recoveries, Mr. McNees, an economist at the Fed's Boston branch, also has some forecasts for the future.
In the post-World War II period, expansions have lasted nearly four years on average, and peacetime expansions nearly three years. The longest peacetime expansions lasted nearly five years (1975-1980). The shortest (1980) lasted only one year.
Usually, he says, inflation has started to pick up before the end of a recovery. He sees no sign yet of such an acceleration in inflation today, predicting that the consumer price index this year will rise around 4 percent. So he reckons that the recovery has at least another year to go, though growth should slow this year to around 4 percent.
McNees's optimism on inflation stems from the current prospects for relatively steady food and energy prices, modest growth in wages and salaries because of the high unemployment levels and favorable recent inflation experience, and the return to near-average productivity growth.
The strength of the dollar, he notes, has also helped restrain prices by restraining the prices of imports and those products facing import competition. If the dollar weakens, McNees adds, it will not boost prices much in 1985, though maybe it will in a later year.
Mr. McNees is also somewhat more optimistic for unemployment than the administration forecast. He says 6.4 percent at the end of this year, while the government is saying 6.9 percent.
He concludes: ``I am pretty sanguine about the outlook for 1985.''