Over the last 4 years, the US has averaged 3.5% annual GDP growth, which is exactly at the long-term trendline. The unemployment rate is lower than it has been for 35 of the last 38 years, with seven million jobs being created in the last 3 years alone. What is remarkable is that in this period, a number of factors that have caused recessions in the past have occurred, even as new negative forces have simultaneously emerged, and all these in tandem have not derailed economic growth. But does this mean we could be growing even faster, had these problems not emerged? Let us look at all the bullets that did not manage to do the damage that they once did, and the new bullets that we have successfully endured.
1) Terrorism and War : Depending on how one measures it, the Sept. 11, 2001 terrorist attacks cost the US economy anywhere from $200 to $800 billion. In addition, it worsened the recession on 2001-02, and still slows the productivity of the US economy through longer lines at airports, increased security expenditures, difficulties that law-abiding foreign tourists face in getting visas to enter the US (costing us over $100 billion a year in tourist revenue), etc. This is effectively a new tax that we will be paying in perpetuity.
While the War on Terror has still cost the US just 3000 troops in 5 years (vs. 50,000+ in VietNam and Korea), the negative media coverage and resultant burden on the mood of the US consumer today may comparable to what it was during the VietNam War. Add to that the threat that Americans could be killed in the US mainland when they least suspect it, and thus exists a lingering fear that makes consumer confidence lower than it should be.
2) Oil Spike : When oil reached $90 in today's dollars back in 1980, this caused a very deep recession, even though prices quickly dropped after that. In 2006, oil reached $78 per barrel before dropping, without causing a recession. In fact, it appears that sustained prices near $60/barrel are not sufficient to cause a drag on the US economy. This is partly because of the US economy evolving to a state where a large portion of output is derived from innovation and technological advancement, which are much less tied to oil prices. An oil spike hurts GM and American Airlines much more so than it hurts Google and Microsoft.
Read : $70+/barrel oil, the non-crisis.
3) Massive Natural Disaster : Hurricane Katrina was the largest natural disaster the US has been struck with in several decades, with the direct economic costs of a major city being submerged with water compounded by the displacement of hundreds of thousands of people and the economic activity they would otherwise generate. It cut the GDP growth of Q305 down to 1.8%. But in the next quarter, GDP bounced back smartly to 5.6%. The US economy adapted to the shock in a very short time.
4) Corporate Scandal Tax : While scandals like Enron and Worldcom could happen in any era, the resultant Sarbanes-Oxley (SOX) legistation has proven to be so oppressive to law-abiding corporations that the economic cost exceeds that of the implosion of Enron and Worldcom by a large margin. Medium-sized public companies have to pay an estimated $3 million per year to comply with SOX, which is money that could otherwise go towards R&D, or be passed onto shareholders. Estimates of the total opportunity cost of SOX over the last 3 years run as high as $1 trillion. Hopefully SOX can be scaled back for medium-sized enterprises with under $1 billion in annual revenue.
5) Trade Deficit : The US trade deficit, or the amount by which imports exceed exports, is not entirely a negative economic force, but it currently is over 5% of GDP, vs. just 2% of GDP in the mind-1990s. This reduces the total US GDP growth rate by over 1% a year.
I do not consider 'outsourcing' to be a negative for the US economy. I consider it to be a positive, for reasons described here.
Despite all these blows, the US economy has continued to grow at 3.5% for the last 3 years. It almost appears that the forces that would traditionally cause a recession are running out, with only three remaining :
1) A Housing Bust : The effect of this could be similar to the stock-market crash that contributed to the 2001 recession, but as the housing decline is already 1 year on, if a recession does not occur by the end of 2007, the US economy will have successfully digested this correction without a recession. This is a once-in-a-lifetime occurance, just like the dot-com bubble was.
2) A terrorist attack larger than September 11, 2001. Of course, this may happen tomorrow, or may not happen for several years.
3) A pandemic like bird flu could cause tremendous economic damage, but the US would still be able to cope better than almost any other country in the world.
Even then, it sounds too good be true that recessions will be increasingly less frequent in the future. But consider that economic growth is exponential and accelerating, permitting the trendline of economic growth rates to move increasingly higher. The number of quarters in which the US experiences negative continues to decrease as a percentage of all calendar quarters. But what if other parts of the world have accelerated even faster?
The trendline for World GDP growth is now at a robust 4.5% a year at PPP, and the world economy has not had a year of negative growth since 1973, with almost no year growing under 1% since 1983. A year with negative growth is so many standard deviations below the mean 4.5% trendline that the probability of it occuring in the next several years is mathematically small. In other words, the proportion of years in which world GDP growth is negative continues to decrease, and is asymptotically approaching zero. A global slowdown would still constitute growth of around 2% a year for a couple of years. Only a calamity such as a major bird-flu pandemic could cause a genuine recession for the world economy.
But this also means that while the US economy is growing at a strong rate relative to historical trends, it is actually lagging the world economy for the first time in several decades. If the US is chugging along at its long-term 3.5% trendline, the world is accelerating faster. In fact, developing regions by themselves are growing at nearly 7% a year. This graph shows how the developed world has remained steady (with the US exceeding the growth rate of the rest of the developed world) even as developing regions have broken away.
So in conclusion, the US economy is performing very well relative to historical norms, and this is even more remarkable given the many blows it has taken in recent years. But these blows have taken a toll - and the toll is that the US now lags the growth rate of the world economy by a significant margin.