No-respect recovery may wind up becoming longest ever in U.S.

WASHINGTON – It may not seem like much of a recovery to most Americans, but the current economic expansion has many of the makings to become the longest in more than 150 years.

Low inflation, healthy consumer finances and pent-up demand for housing all argue that the recovery is well-positioned to withstand any fallout from the Greek crisis and has room to run as it enters its seventh year on Wednesday.

“There’s a high probability that we will exceed the 10- year expansion of the 1990s,” the longest in records going back to 1854, said Allen Sinai, CEO of Decision Economics Inc. in New York.

The benefits of such an outcome would be dramatic. Unemployment would drop below 5 percent – it’s 5.5 percent now – and keep on falling. Corporate profits, already at record levels, would rise further. And the stock market would make repeated new highs, according to Sinai.

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One big proviso: the ability of the Federal Reserve to raise interest rates from rock-bottom levels without upending inflated financial markets and squelching growth. Many of the past upswings were cut short when the central bank tightened credit to keep the economy from overheating as unemployment fell and factories operated closer to capacity.

Most Fed officials expect to raise interest rates this year for the first time since 2006, according to projections released after their meeting earlier this month.

The expansion already has gone on longer than the postwar average of just under five years and next month will match the duration of the 2001 to 2007 upturn. It’s been marked by ebbs and flows as the U.S. was buffeted by everything from a government shutdown in Washington to a tsunami in Japan that disrupted global trade.

Greek crisis

The Greek crisis is the latest shock, and like the previous ones, it could curb U.S. economic growth, not end it, said Nariman Behravesh, chief economist in Lexington, Mass., for IHS Inc. “It’s not necessarily all bad for the U.S.,” he added, as foreign investors worried about the durability of the euro region buy Treasury securities.

The current upswing so far has been the weakest of the post-World War II period, with growth averaging 2.2 percent annually, below the 2.8 percent pace of the previous expansion and the 3.6 percent recorded in the 1991 to 2001 upturn.

It’s no news to most Americans that the economy’s performance has been lackluster. Three out of five polled by Fox News last month said the country is still in recession.

No respect

“I call it the Rodney Dangerfield expansion,” said David Rosenberg, chief economist at Gluskin Sheff & Associates, in Toronto, alluding to the U.S. comedian’s trademark complaint that he “don’t get no respect.”

The expansion’s modest pace has a silver lining. It’s kept inflation down, allowing the Fed to hold its target for short-term interest rates near zero since 2008. It’s also meant that the U.S. so far has avoided the kind of debt-driven excesses that ultimately can bring an upswing to a halt, as happened in the last decade when the housing boom went bust.

“The curse of the economic cycle to date, which has been its sluggishness, is now turning into a blessing, resulting in greater longevity,” said Carl Riccadonna, chief U.S. economist for Bloomberg Intelligence in New York. The upturn “has a lot further to run.”

In a vote of confidence that demand will prove durable, General Motors Co. in April said it will spend $5.4 billion on its U.S. plants during the next three years as the country’s biggest automaker prepares to build a series of new models. GM also announced in May that it will add 2,600 jobs as part of a plan to renovate its Tech Center in Warren, Michigan.

U.S. consumers are starting to open their wallets after spending the last six years fortifying their finances in the wake of the deepest contraction since the Great Depression.

Household finances

They’re certainly in a position to do so. Household net worth as a percentage of disposable income is at its highest level since before the recession began at the end of 2007, while consumer delinquencies on credit cards, auto and other loans are near record lows.

Consumer sentiment as measured by the University of Michigan’s index soared in June, exceeding all estimates in a survey of economists and capping the most optimistic first half of any year for households since 2004.

“The household sector is in great shape,” Sinai said.

The housing market also is starting to pick up after languishing much of last year. Purchases of new homes in the U.S. rose in May to the highest level in seven years, the Commerce Department reported last week.

Housing demand

“We’re still in the early stages of a multi-year slow-but- steady housing recovery,” Stuart Miller, CEO of Lennar Corp., the second-largest U.S. homebuilder, said on a June 24 conference call. “Without a dramatic increase in the number of homes built in this country, we will continue to be short dwelling units for a growing population. Supply is limited and demand is building.”

It isn’t only housing that’s been slow to recover. So too have business investment and consumer spending on durable goods. Taken together with residential construction, they currently account for just under 24 percent of gross domestic product, Rosenberg said. That’s well below the average 28 percent peak reached in previous cycles, suggesting stronger outlays ahead.

The low level of inflation also argues for a longer-lived expansion. As measured by the personal consumption expenditure price index, the Fed’s favorite gauge, it was just 0.2 percent in May, well below the central bank’s 2 percent target.

Wage growth

Wage increases have started to pick up, but they’re still below levels Fed officials consider natural. Employment costs, which include wages and benefits such as pensions, rose 2.6 percent in the first quarter from a year earlier. That compares with the 3 percent to 4 percent increase Fed Chair Janet Yellen has said would be normal for the U.S. economy.

“While the slow pace of wage gains is painful for workers, it is helping to keep inflation down and thus to postpone again and again the need for the Fed to raise interest rates in a way that would cut short the expansion,” Robert Gordon, a professor at Northwestern University in Evanston, Ill., said in an e-mail. Gordon, who’s a member of the National Bureau of Economic Research committee that determines when recessions begin and end, sees the expansion lasting another three years.

Full employment

The committee’s chairman, Robert Hall, also says “there is quite a bit of room for expansion” even though the labor market has tightened significantly. At 5.5 percent in May, the jobless rate is well down from the 10 percent mark it hit in 2009 and is closing in on the 5 percent to 5.2 percent level most Fed officials reckon is equivalent to full employment.

Hall, who is an economics professor at Stanford University in California, said in an e-mail that unemployment can fall further without generating much inflation as the improving economy draws more Americans into the labor force.

“Don’t forget that the unemployment rate reached a low of 3.8 percent in 2000,” he said.

Harvard University professor and fellow committee member Martin Feldstein is more cautious. “I don’t think one can forecast when an expansion will come to an end,” he said in an e-mail.

Feldstein is worried that the Fed may have kept monetary policy too easy for too long. “I do see increased risks that have resulted from the exceptionally low interest rates,” he said. “Even if rates normalize slowly and without substantial inflation, there could be substantial financial losses and dislocations.”

Keeping on

There are other dangers. With growth so low, it wouldn’t take much of a blow to push the U.S. into a recession, said Richard Clarida, global strategic adviser for Pacific Investment Management Co., which oversees some $1.6 trillion in assets.

“The baseline view though is that this expansion keeps on keeping on,” said Clarida, who sees the upturn lasting at least three more years.

Since 1950, the U.S. has experienced a recession at the start of every decade except the current one, noted Mark Zandi, chief economist at Moody’s Analytics Inc. in West Chester, Penn.

“If that bit of economic astrology holds, the next one will be in 2020,” he said with a laugh. “I wouldn’t argue with that.”

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