Is it possible for economic news to be a little too good? If many economic worries seem to be dwindling, is that reason to be scared? After periods of success, are economies due for a comeuppance — perhaps even for reasons stemming from their earlier achievements?
What prompts these questions is the current US economy. The good news is evident: Its 2.4% growth rate last quarter exceeded expectations, inflation has fallen to the 3% range, wage gains are finally exceeding price hikes, stock prices have rebounded, measures of volatility have been low, and consumer sentiment is improving.
To be sure, matters are hardly perfect. The number of job openings has been falling, banks still have problems with non-performing commercial loans, and inflation is still too high, among other problems. Nonetheless, especially considering what could have happened after a pandemic that killed well over 1 million Americans, the US economy seems unreal, in the best sense of that term.
But the question persists: How worried should we be? There is a common and popular tradition that suggests an economic recovery is a harbinger of bad times. Perhaps a recovery has a kind of expiration date, just like the milk in your refrigerator. After some period of time, it simply goes sour, no matter what you might try to do to keep it fresh.
The good news is that the old macroeconomic saying — “Expansions don’t die of old age” — is basically true. Most academic literature supports that conclusion. There is always a possibility that an expansion can turn into a recession, as remains the case today, but the mere fact of an expansion should not be cause for worry.
In 2010, experts were asked whether the economic recovery would run out of steam. Instead, it continued until Covid intervened — and right before Covid, the economy even accelerated. In 2021, the OECD worried that the US recovery from the pandemic might be slowing down. That worry also turned out to be wrong.
Again, the proper conclusion is not that recession is impossible. It is that recession does not become more probable as the recovery proceeds.
It’s important to resist the temptation to think of economic expansions in moral terms. An economic expansion is not like a party where you drink too much and then have to pay the price the next day. Most economic growth is not like an artificial stimulant. Rather, growth is a natural condition for an economy, provided that the country’s underlying institutions are sufficiently functional (as is the case for the US). Growth begets more growth, again on average.
Might there be exceptions to these principles? Some research suggests that rapid credit booms, especially in mortgage markets, tend to be followed by hard landings, and that helps explain the Great Recession of 2008-2009. But those facts don’t apply to current circumstances. If anything, the worry is that with mortgage rates within the range of 7%, US housing markets might be too weak.
One lesson is simply that it’s OK to be a bit more confident about economic expansions. But there is a subtler point as well. When it comes to macroeconomic policy, “getting it right the first time” really matters. Following a negative shock such as Covid, if the economy stays more or less on track (albeit with bumps), the sustained benefits from that good favor can continue for years.
It remains to be seen how the durability of economic expansions affects economies beyond the US. The UK and the EU economies have not had the same bounce back, and most of them have not had comparable success in limiting inflation. Unfortunately, just as good news can lead to more good news, so do economic difficulties tend to breed further problems. High inflation will erode real incomes and render business calculation more difficult, while slow growth means those economies have fewer real resources for addressing crucial problems. When you put all of those factors together, the economic gap between the US and many other OECD nations is likely to continue to grow.
It may sound trivial to say there is nothing better than good news. Nevertheless, the wisdom of that maxim remains underrated.
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