The record-breaking US economic recovery in charts

Longest expansion in modern American history is also the weakest

Robin Wigglesworth in New York and Keith Fray in London

© FT montage

The post-crisis US economic expansion this week became the longest uninterrupted stretch of growth in modern American history. Yet it has been a mixed performance, and some signs of decrepitude are beginning to show.

President Donald Trump has claimed credit for the growth spurt, tweeting on Tuesday that “the Economy is the BEST IT HAS EVER BEEN! Even much of the Fake News is giving me credit for that!”. But he has only been president for 2½ years of the decade-long expansion.

The US economy exited its financial crisis-induced recession in June 2009, according to the National Bureau of Economic Research. This week it hit a record 121st month of expansion, surpassing the 1991-2001 economic boom — current growth is running at about 1.5 per cent according to the Atlanta Fed’s “nowcasting” model.

Better than the rest

The US economic recovery has been better than those of other leading developed countries, many of which suffered their own financial crisis or subsequent economic tribulations in the decade from 2008 onwards.

The US initially lagged behind Germany and Canada in the early years of the recovery, but the German economic machine began to splutter during the eurozone crisis, and Canada’s recent deceleration means that America has pipped it to the top-performing spot among developed economies since mid-2009.

Long but limp growth

Although it has been a long recovery, it has been relatively weak by historic standards.During the previous record expansion, the Clinton-era boom of the 1990s, the economy grew by 43 per cent, and in the shorter Reagan-era boom of the 1980s it increased by 38 per cent. The present period has seen cumulative growth of only 25 per cent — equating to average annual growth of 2.3 per cent, the lowest in the modern era, and well below the 7.6 per cent achieved on average during the postwar expansion in 1950 to 1953 — the highest annual growth rate of recent decades.

Chart showing how the record period of growth in the US is anaemic in level compared to previous booms

Crisis hangover

Financial crises tend to lead to feeble economic recoveries as companies, governments and ordinary people struggle to deal with the wreckage left in their wake.

US economic growth in the current decade has been the poorest of any 10-year period since NBER’s measures begin in 1854, with the exception of the Great Depression in the 1930s, and the 2000s, which were blighted by two recessions.

Chart showing how US growth is lower in this decade than any other decade since 1860 with the the exception of the 1930s and the 2000s

Manufacturing the weak link

The relative weakness of the current economic expansion is owing to the underperformance of the manufacturing sector.

Despite Mr Trump’s rhetoric in the 2016 election campaign about sparking a revival in the traditional industrial regions of the US, this expansion has been overwhelmingly based on services, which were responsible for two-thirds of the increase in value added from 2009 to 2018.

Manufacturing, in contrast, contributed less than 10 per cent of the total increase. Extractive industries — particularly shale gas — also provided a much-needed boost to the economy in the early years of the decade.

Inequality on the rise

Another drag on growth has been the rise of social and economic inequality.

Not all Americans have benefited from the decade of growth. While median household income, adjusted for inflation, rose almost 8 per cent from 2009 to 2017 — the latest data available — the average conceals significant differences at either end of the income scale.

The top 20 per cent of households have seen a 13 per cent increase over the period but for the poorest fifth the corresponding rise is only 0.2 per cent.

Jobs, jobs, jobs

On the face of it, the labour market has put in a solid performance. The unemployment rate is at a half-century low of just 3.6 per cent, and job openings now outpace the number of registered unemployed people by a record number.

Some employers complain of skills shortages, which could be holding growth back somewhat, but it indicates that the jobs market is fairly tight.

Wages are rising

The tight labour market has taken time to feed through into wages, but there are some signs of pressure on employers to increase salaries. Wage growth has been heading haltingly upwards since 2015.

That has helped improve household balance sheets and supported consumption — the single biggest driver of the US economy.

However, year-on-year growth in average hourly earnings has slowed in recent months, and job creation disappointed in May, stirring concerns that the long-lived expansion may finally be weakening.

Citi’s economic surprise index, which measures whether data are coming in better or worse than expected, has been in negative territory throughout 2019, suggesting that other economic indicators are also weakening.

Bond market warning

Perhaps the biggest alarm bell is going off in the bond market. The so-called yield curve — the yields paid by US Treasury bonds at a range of maturities — has inverted, with 10-year government bond yields paying less yield than short-term bills.

Normally borrowing money for longer periods should cost more, and when this normal relationship is upended it indicates that investors think the growth outlook is weakening and the central bank will have to cut interest rates. An inverted yield curve has historically been a signal that a recession is looming.

The US Federal Reserve has warned against over-interpreting the yield curve movements, but the New York Fed’s own yield curve-derived recession probability model indicates a near-30 per cent chance of an economic downturn over the next 12 months.

Breaking the wave

Investors and regulators fall out of love with colossal deals

The long swell in dealmaking may be subsiding

NO ONE ON Wall Street puts it quite like Carl Icahn. “There are far too many boards”, the veteran activist investor opined on June 24th, that “believe...that stockholders are the peasants who represent a necessary evil that must be tolerated, possibly patronised, but certainly ignored.” Mr Icahn’s target was Occidental, an oil firm whose directors are pursuing an unpopular $55bn takeover of Anadarko, a rival.

But his outburst reflects a broader change in mood on mergers and acquisitions (M&A).

Dealmaking always reflects a power struggle between empire-building executives and bankers, and more cautious investors and regulators. After years of waving through deals, shareholders and trustbusters are now getting testier again.

Since 2000 a big trend in American business has been domestic consolidation. Firms have sought to grow at home in order to reap economies of scale and to dampen competition. Some industries, for example telecoms and airlines, have become far more concentrated. The result has been higher corporate profits, which is why investors have cheered the dealmaking on.

A long-standing rule of thumb is that takeovers usually destroy value for the acquiring company, which overpays. But over the past decade that has not held true in North America. Since 2008 the share prices of acquirers have outperformed the stockmarket by a median of 1.1% in the quarter when the deal was announced, according to Willis Towers Watson, a financial firm.

At first glance it has been business as usual this year. About $1.8trn of deals have been announced globally and 53% of them by value have been in North America, according to Mergermarket, an analysis firm. Rather than expanding abroad in an unstable geopolitical environment, American firms have focused on growing at home.

Consider some of the biggest deals. United Technologies’ (UTC) $90bn merger with Raytheon will create a new defence giant. AbbVie is spending $84bn on Allergan, another big drugs firm. Occidental’s purchase of Anadarko will create an energy behemoth. And by buying Caesars, Eldorado Resorts will become a huge player in Las Vegas. Together these firms generate 71% of their revenues within America’s borders.

Rather than cheering activity on, however, investors are in revolt. As Tara Lachapelle, a commentator at Bloomberg, put it, deals are being “panned instantly”. On the two days after their acquisitions were announced, UTC’s shares fell by 7%, AbbVie’s by 13%, Occidental’s by 9% and Eldorado’s by 14%. This fits a broader pattern of underperformance. Over the past 12 months North American buyers have had a median share-price drop of 4.2 percentage points relative to the stockmarket, Willis Towers Watson reckons.

What has changed? Part of the explanation is that the fashion among investors has shifted away from giant but stodgy firms intent on raising their margins through cost-cutting, towards smaller, loss-making ones with fast revenue growth—hence the current boom in initial public offerings by tech firms. Some big deals have already soured:AT&T’s share price has dropped by 12% since it announced the takeover of Time Warner in 2016.

There is also a sense that after years of consolidation the deals that are left may be scraping the bottom of the barrel. Occidental is paying top dollar for Anadarko after winning a bidding war with Chevron. AbbVie and Allergan are both mature companies with poor drug pipelines. Eldorado is taking on more debt to buy Caesars.

As the economics of mega-deals have got worse, shareholders have got more unhappy. UTC faces attack from two activist investors: Daniel Loeb, who called the deal “baffling”, and William Ackman, who says it “makes no sense”. Some firms seem to have structured their deals to avoid having to get shareholder approval, which is normally required when new shares issued exceed 20% of the number outstanding. AbbVie is issuing 19.2% of its shares to buy Allergan.

Occidental issued $10bn of preference stock to Warren Buffett in order to avoid having to issue so much common stock that it would need to have a shareholder vote. Even so, activist investors can find other ways to cause problems. Mr Icahn has said that he will launch a proxy fight to oust four of Occidental’s directors in order to block the takeover. On July 2nd Occidental urged its shareholders to spurn Mr Icahn’s advances.

If investors are one impediment to big deals, antitrust regulators are the other. Over the past two decades they have been a walkover, but there are signs this is changing. The merger of Sprint and T-Mobile, two mobile-network operators, still awaits approval after a long delay. Even if the Department of Justice gives it the green light, a coalition of state attorneys-general has pledged to fight the deal, which they say will reduce choice for consumers.

The mood has also shifted against big tech firms. An emerging consensus among antitrust types is that these should be blocked from scooping up smaller firms because of the worry that it would eliminate potential rivals. Past deals that sailed through, such as Facebook’s $18bn takeover of WhatsApp in 2014, or Microsoft’s $24bn purchase of LinkedIn in 2016, would probably face a rougher ride from the antitrust police now. A de facto ban on tech firms doing big takeovers could depress deal activity for years, given that they are now the biggest firms in America by market value and are blessed with cash-rich balance-sheets.

Mergers and acquisitions have come in waves ever since the first frenzy of consolidation in the late 19th century. The past two decades have seen one of the greatest waves ever as executives have sought to build corporate giants with market power over consumers, applauded by investors and enabled by trustbusters. The dealmaking in 2019 suggests that this long swell is finally subsiding.

Warning shots

South Korea and Russia face off in the skies

An aerial confrontation brings home the risks of north-east Asia’s simmering disputes

ONE HOPE behind the visit by John Bolton, President Donald Trump’s national security adviser, to Seoul this week was that it might help patch up a row between South Korea and another close American ally, Japan. The rift, with its roots in colonial history and wartime animosity, has brought trade sanctions from Japan.

It is also jeopardising military co-operation and the renewal next month of an intelligence-sharing agreement—especially important in face of the threat from North Korea, which on July 25th was reported to have made its latest missile test. As Mr Bolton arrived two days earlier, his arguments for the importance of the agreement had already been bolstered by a vivid demonstration of the fragility of regional peace. South Korea’s fighter jets had fired 360 warning shots at a Russian military aircraft that it said had intruded into its airspace.

The details are disputed. South Korea said that Russian and Chinese planes had penetrated its self-declared Korean Air Defence Identification Zone (KADIZ), an area around its borders where it requires foreign planes to notify it of entry. A Russian spy plane then twice intruded into South Korean airspace, prompting the air force to scramble jets. Russia denied the incursion, and that shots had been fired. But it accused South Korea of “hooliganism in the air” for harassing its aircraft. The next day South Korea reported that Russia had changed tack, expressing “deep regret” and blaming the incident on a technical glitch. 
Russia soon denied having issued any apology. But whatever the origin of the confrontation, it highlights three reasons for America to worry about north-east Asia. The first is growing military co-operation between China and Russia, which appear to have been conducting a joint patrol around South Korea. A second is the patchwork of unsettled territorial disputes.

The alleged incursion took place over the waters around islands known as Dokdo by South Korea, which controls them, and Takeshima by Japan, which also claims them. Japan also scrambled jets and has protested to both Russia (for violating its airspace) and South Korea (for firing in it). To the south, Japan and China contest the Senkaku or Diaoyu islands. The disputes werefurther complicated when China in 2013 announced its own ADIZ, over these islands. South Korea then expanded the KADIZ. The three countries’ zones overlap.

The third worry is of an accident or misunderstanding. For two countries that have long been at peace, Japan and South Korea keep their fighter pilots busy. In the 12 months that ended this March Japan scrambled its jets 999 times in response to aerial incursions—two-thirds of them by China over the Senkakus, the rest by Russia over yet more disputed islands to the north of Japan. South Korean pilots, too, frequently respond to Chinese forays into the KADIZ. With so much muscle-flexing in the skies, it is easy to imagine a disastrous miscalculation—especially if, as this week, shots are fired.

America must hope the incident will remind South Korea and Japan that the security threat to each comes not from the other but from North Korea and an assertive China, further encouraged by its ever closer ties with Russia; and that in response South Korea and Japan should be shoulder to shoulder, not eyeball to eyeball.

UBS plans negative interest rate for rich clients

Latest European bank to pass cost of central banks’ ‘lower for longer’ stance to depositors

David Crow, Stephen Morris and Alice Ross in London

UBS plans to levy a negative interest rate on wealthy clients who deposit more than SFr2m with its Swiss bank, as lenders hunker down for a period of ultra-loose monetary policy.

Several banks in Switzerland and the eurozone already pass on the cost of negative official rates to corporate depositors, although most large players have refrained from doing so with individual clients.

But with policymakers expected to adopt a “lower for longer” stance for the foreseeable future, UBS Switzerland will from November charge 0.75 per cent a year on individual cash balances above SFr2m, according to three people briefed on the plans.

The move underscores how banks in Europe and the US are scrambling to prepare for a protracted spell of lower rates that threatens their profitability, having previously wagered that central bankers would tighten monetary policy.

Last month the Swiss National Bank said it would hold the negative rate it charges on commercial banks’ deposits at -0.75 per cent, while the European Central Bank deposit rate is -0.4 per cent. The US Federal Reserve is expected to cut interest rates later on Wednesday.

“A year ago everyone thought interest rates would go up. Now it doesn’t look like that,” said one senior wealth manager at UBS. In a note to clients last month, the lender forecast that the SNB would in September lower its rate on deposits to -1 per cent.

UBS relationship managers have started discussing the forthcoming charges with some wealthy clients and are preparing to issue a letter outlining the changes, the people added. Some of the bank’s smaller rivals, such as Julius Baer and Pictet, already charge some clients with large cash deposits.

“We assume that this period of low interest rates will last even longer and that banks will continue to have to pay negative interest rates on customer deposits at central banks,” UBS said. “Following similar moves by a number of other banks here in Switzerland, we confirm that we’ve decided to adjust cash deposit fees for Swiss francs held in Switzerland.”

The move comes as Credit Suisse, UBS’s main rival, said on Wednesday it was also thinking about imposing a levy on some wealthy clients.

“In Switzerland, we are considering measures on deposits to mitigate pressure of negative interest rates,” Tidjane Thiam, Credit Suisse chief executive, told reporters during a discussion of the bank’s half-year results.

He said any levy would be “targeted on people . . . that measure their cash balances in millions”.

UBS clients who want to avoid the levy can move their balances into non-cash assets or into “fiduciary call deposits” that can be transferred back to the customer’s main account within 48 hours, two of the people said.

The FDCs are held in third-party banks or UBS entities based outside Switzerland, meaning the lender does not have to pay negative rates to the SNB, two of the people said.

Mysteries of Monetary Policy

Since the federal funds rate peaked at 22% in the early 1980s, inflation in the United States has remained low and stable, leading many to believe that the mere threat of renewed interest-rate hikes has kept it in check. But no one really knows why inflation has been subdued for so long.

Robert J. Barro


CAMBRIDGE – One of the remarkable features of post-war economic history has been the taming of inflation in the United States and many other countries since the mid-1980s. Before then, the US inflation rate (based on the deflator for personal consumption expenditures) averaged 6.6% per year during the 1970s, and exceeded 10% in 1979-1980. 

In the early- and mid-1970s, Presidents Richard Nixon and Gerald Ford tried to curb inflation with a misguided combination of price controls and exhortation, along with moderate monetary restraint. But then came President Jimmy Carter, who, after initially maintaining this approach, appointed Paul Volcker to chair the US Federal Reserve in August 1979. Under Volcker, the Fed soon began to raise short-term nominal interest rates to whatever level it would take to bring down inflation.

Volcker, backed by President Ronald Reagan after January 1981, stuck with this approach, despite intense political opposition, and that July the federal funds rate peaked at 22%. The policy worked: annual inflation fell sharply to an average of just 3.4% from 1983 to 1989. The Fed had satisfied in extreme form what later became known as the Taylor Principle (or, more appropriately, the Volcker Principle), whereby the federal funds rate increases by more than the rise in the inflation rate.

Since then, the Fed has guided monetary policy primarily through control over short-term nominal interest rates, especially the federal funds rate. When its power over short-term borrowing costs was compromised following the 2008 financial crisis – because the federal funds rate approached its (roughly) zero lower bound – the Fed supplemented its main policy instrument with forward guidance and quantitative easing (QE).

Judging by the US inflation rate over past decades, the Fed’s monetary policy has worked brilliantly. Annual inflation has averaged only 1.5% per year since 2010, slightly below the Fed’s oft-expressed target of 2%, and has been strikingly stable. And yet, the question is how this was achieved. Did inflation remain subdued because everyone believed that anything significantly above the 1.5-2% range would trigger a sharp hike in the federal funds rate?

There is a large body of research into how changes in the federal funds rate influence the economy. A 2018 paper by Emi Nakamura and Jón Steinsson in the Quarterly Journal of Economics, for example, finds that a contractionary monetary shock – an unanticipated rise in the federal funds rate – raises yields on Treasury securities over a 3-5-year horizon, with a peak effect at two years. (Results for expansionary shocks are symmetric.) Most of these effects apply to real (inflation-adjusted) interest rates, and show up in indexed bonds as well as conventional Treasuries. The effect of a contractionary shock on the prospective inflation rate is negative but moderate in size, and sets in significantly only after 3-5 years.

Although unexpected increases in the federal funds rate are conventionally labeled as contractionary, Nakamura and Steinsson find that “forecasts about output growth” actually rise for the year following an unexpected rate hike. That is, a rate increase predicts higher growth, and a decrease predicts lower growth. This pattern likely occurs because the Fed typically raises interest rates when it gets information that the economy is stronger than expected, and it cuts rates when it suspects that the economy is weaker than it previously thought.

The same paper also finds that an unanticipated rise in the federal funds rate is bad for the stock market (and vice versa), which accords with the deeply held views of many financial commentators, not to mention US President Donald Trump. The authors estimate that an unanticipated rate cut of 50 basis points raises the S&P 500 stock-market index by about 5%, even though projected real GDP growth declines. The likely reason is the decrease in expected real returns on competing financial instruments, such as Treasury bonds, over the next 3-5 years. This discount-rate effect overshadows the negative influence on stock prices from lower expected future real earnings.

But, again, the puzzle is how the Fed can keep inflation steady at 1.5‑2% per year by relying on a policy tool that seems to have only weak and delayed effects. Presumably, if inflation were to rise substantially above the 1.5-2% range, the Fed would initiate the type of dramatic increases in short-term nominal interest rates that Volcker carried out in the early 1980s, and these changes would have major and rapid negative effects on inflation. Similarly, if inflation were to fall well below target, perhaps becoming negative, the Fed would sharply cut rates – or, after hitting the zero-lower bound, use alternative expansionary policies – and this would have major and rapid positive effects on inflation.

According to this view, the credible threat of extreme responses from the Fed has meant that it does not actually have to repeat the Volcker-era policy. Rate changes since that time have had modest associations with inflation, but the hypothetical possibility of much sharper changes has remained powerful.

Frankly, I am unhappy with this explanation. It is like saying that the inflation rate is subdued because it just is. And, no doubt, a key factor is that actual and expected inflation have both been low – the two are intimately connected twins. But this suggests that the monetary policy behind today’s low and stable actual and expected inflation will keep working until, suddenly, it doesn’t.

This makes me wish that I had a better understanding of monetary policy and inflation. It also makes me wish that the people responsible for monetary policy had a better understanding than I have. Many readers, no doubt, would say that my second wish has already been granted. Let us hope they are right.

Robert J. Barro is Professor of Economics at Harvard and a visiting scholar at the American Enterprise Institute. He is co-author (with Rachel M. McCleary) of The Wealth of Religions: The Political Economy of Believing and Belonging.

This (Completely Reasonable) Change In Investor Behavior Would Send Gold To The Moon

by John Rubino

Mark Mobius took over for the legendary John Templeton at Franklin Templeton’s Emerging Markets Fund back in the 1980s, and filled those big shoes well for three decades. Now running his own shop, he recently made what seems like a completely reasonable suggestion about gold — one that if adopted by the broader investment community would send the metal’s price to the moon:

Gold Bull Mobius Says Every Portfolio Needs at Least 10%
(Bloomberg) — Veteran investor Mark Mobius says that gold’s set to push higher, potentially topping $1,500 an ounce, as interest rates head lower, central banks extend purchases, and uncertainty surrounding geopolitics and cryptocurrencies fans demand.“I love gold,” Mobius, who set up Mobius Capital Partners LLP last year after three decades at Franklin Templeton Investments, said in an interview in Singapore, adding bullion should always form part of a portfolio, with a holding of at least 10%. “As these interest rates come down, where do you go?” 
Gold has rallied in 2019, rising to the highest level in six years, as investors contemplate slowing economic growth, prospects for easier monetary policy in the U.S. and Europe and festering trade frictions.  
The upswing has been given added momentum as central banks, including authorities in Russia and China, step up purchases. A revival in cryptocurrencies may lead to spillover demand from investors for the older haven, according to Mobius. “Interest rates are going so low, particularly now in Europe,” he said. “What’s the sense of holding euro when you get a negative rate? You might as well put it into gold, because gold is a much better currency.”

Two points about Mobius’ suggestion that most portfolios should be 10% allocated to gold:

First, the idea of replacing dollar cash with a historically better-performing store of wealth seems like a no-brainer in a world of soaring fiat currency debt and plunging interest rates.
Second and vastly more interesting, the current allocation to gold in the financial world is about 1% of total investable capital, so moving from here to 10% would produce spectacular price gains for gold. If it’s even possible, which it might not be: Most current demand for physical metal is from the Chinese and Russian central banks, which presumably won’t be selling their reserves to investors anytime soon.

As for gold mining stocks, here’s a chart from Marin Katusa showing their weighting within the S&P 500. Note that it’s both minuscule and historically low. A reversion to just the average would send the miners up dramatically.