The expansion just registered its 7th birthday, but:
Even seven years after the recession ended, the current stretch of economic gains has yielded less growth than much shorter business cycles.
And this chart from Fox News shows how “undeveloped” the child really is.
The set of charts below provide a view of contractions and expansions (and stock prices) since the start of the 1960s (I ignore the 1980-81 cycle). The scales are the same for all contractions and for all expansions to make comparison easier.
Some contractions are short and shallow, some are longer and deeper, but none was as long and as deep as the 2007-09 contraction. That one was also unique in that NGDP growth turned negative. Observe that until that point, the recession was nothing to call home about, but then we experienced the consequence of the greatest monetary policy error of the post war period.
The 1960-61 contraction was mild and stock prices remained flat but picked up before the trough. The ensuing expansion was long and robust. Notice, however that half way through, stock prices flattened. The reason is that inflation began an upward trend, following the faster rise in NGDP.
In the 1969-70 contraction, RGDP stayed put, but stock prices fell significantly. Inflation had become entrenched. The expansion phase was short, with the strong increase in NGDP guaranteeing that inflation kept rising, keeping a lid on stock prices.
The 1973-75 contraction is the prototype supply shock recession. NGDP growth grew robustly, fanning inflation, but restraining the fall in real output. Stock prices plunge. The expansion that followed was characterized by high NGDP (inflation) growth with real output and stock prices subdued.
The 1981-82 contraction is the prototype demand shock recession. NGDP growth (and inflation) was brought down forcefully. Although real output fell by more than in 1973-75, stock prices dropped by much less and picked up before the trough. The expansion was long and robust. The 1987 stock crash did not affect real output growth.
The 1990-91 contraction was short and shallow. Inflation was brought down to the 2% level. Stock prices were not much affected. This was followed by the longest expansion in US history. The consolidation of nominal stability that began in in previous expansion is behind the exuberance of stock prices.
In the 2001 contraction, real output didn´t fall at all. The drop in stock prices reflects the Enron et all balance sheet shenanigans. While in the expansion phase the behavior of real output and NGDP were similar to the previous expansion, stock prices were lackluster. The expansion was cut short, giving rise to the Great Recession.
The 2007-09 contraction was a different animal altogether, with things becoming much worse when NGDP tumbled. The strength of the expansion has been held back by a tight monetary policy, where NGDP, after falling substantially in the contraction phase, is growing at a much smaller rate than during the previous two expansions. Since the 2009 trough, stocks prices have shown a robust recovery, but that has petered out since mid-2014, when the Fed began the rate hike talk.
