The Life Cycle of US Economic Expansions
Graphs that allow side by side comparisons of the six longer US expansions since 1950 suggest that these expansions have four distinct phases: (1) a high growth recovery during which the rate of unemployment declines to its pre-recession level, (2) a modest growth plateau during which the rate of unemployment is constant, (3) a growth spurt that drives unemployment down further and (4) a second plateau with modest growth and constant rate of unemployment. There have been only three expansions that have experienced the spurt and none has experienced a second spurt. These phases involve substantially different rates of GDP growth, but within each of these four phases GDP growth is largely unpredictable. Forecast accuracy thus comes mostly from understanding the transitions. This requires both data and economics. The economics takes the form of a predator/prey model of the cycle, where the prey are investment opportunities and the predators are entrepreneurs. A probit model of the transition into recession raises concerns about how much longer the aged Bush/Clinton expansion can last.