A Return to the Business Cycles of Yore

by: James Bacon

The late, little-lamented recession of 2007 to 2009 expired in June of 2009, reported the National Bureau of Economic Research in a statement released Monday. It was the longest recession since the Great Depression, and it capped off a meager, six-year expansion. The United States economy has since embarked upon a new round of economic growth. Any new downturn, the NBER commented, would represent a new recession, not a continuation of the old one.

That raises an obvious question: How long will the current economic expansion last? Will it most closely resemble the lackluster business cycle of the Bush years, or the rip-roaring Reagan and Clinton booms? For the purpose of forecasting a date for the collapse of U.S. government finances (i.e. Boomergeddon), the question matters a lot. A strong, durable expansion will keep the Treasury flush with tax revenues, delaying the inevitable day of fiscal reckoning. A wimpy, limp-wristed upturn will mean fewer revenues, bigger deficits and a snowballing national debt.

A little history helps. According to the NBER’s list of business cycles, the average length of the 11 business cycles since World War II has been 73 months, from trough to trough. All three of the past business cycles have lasted considerably longer than the average:

Reagan/Bush: 100 months
Clinton: 128 months
Bush II: 91 months

Will the Obama expansion match the previous three in strength and duration? Or will it revert to the pattern of shorter business cycles that prevailed between 1945 and 1980?

I believe that U.S. business cycles will return to the tempo of yore. That’s because the Reagan, Clinton and Bush business cycles were propelled by the massive accumulation of debt, adding roughly 1.4% of growth annually over three decades. That rocket fuel — rising house values, tapping homes for equity, the reckless run-up of credit card debt – is gone. Indeed, consumers and businesses are de-leveraging. That fact alone suggests that economic growth will be weaker in the years ahead. If you also consider the government’s unprecedented misallocation of capital, higher taxes, peak oil, and the economic weakness of our traditional trading partners, there is little reason to expect robust growth in the coming decade.

Yet the Obama administration expects the good times to keep on rolling. Here is the most recent 10-year forecast, contained in the Mid-Session Review of the 2011 budget (page 9):

If we’re due for another Clinton-style expansion – one of the most buoyant periods of American economic history – then the economy just might meet those projections. But all evidence points to a sub-par performance in 2011, which could well be prelude to a sub-par performance for the entire business cycle. If the economy reverts to the pre-Reagan, pre-debt accumulation template for recessions every six years or so, we can expect another recession somewhere around the middle of the decade: 2015 or 2016.

If that occurs, Obama's growth projections will shrivel like crumpled paper in the fireplace; the late-decade growth will turn to contraction and deficits will explode. Obama’s projection of a cumulative $8 trillion deficit over the decade will fall far short of the actual number.

Lest the reader think that I am an inveterate Obama basher, let me set the record straight. I don’t regard Obama’s budget forecasters as any worse than George W. Bush’s. In its Fiscal 2007 budget, Bush’s Office of Management and Budget, utterly failing to foresee the impending economic disaster, projected economic growth of 3.1% in 2008 and 3.1% in 2009. Oops. The Obama team may think it’s a whole lot smarter than its Bush counterparts, but I wouldn’t lay money on it. The capacity for self delusion is an ingrained trait of human nature. Obama’s 10-year forecast has failed to take economic history into account. Accordingly, the forecast should be viewed as a best-case scenario — not a likely one.

Boomergeddon draws nigh.

Disclosure: No positions