President's Message: How Long Can The Expansion Continue?

William Poole

The current economic expansion in the United States was 102 months old at the end of September 1999. It began in April 1991, and we have experienced no negative quarters in real gross domestic product growth since then. The pace of economic growth has been especially robust in the last few years. In fact, if real growth continues through the first quarter of next year—and all indications are that it will—the current boom will surpass that of the 1960s and become the longest expansion in U.S. history. What's going on here? Have we banished the business cycle?

Probably not. Any reading of history suggests that market economies have suffered business cycle fluctuations in a variety of times and places, and that periods of good times are interspersed with periods of economic distress, sometimes mild, sometimes severe. Even the vaunted Japanese economy, which has grown rapidly for most of the postwar era, has spent much of the 1990s mired in recession.

But even if the business cycle is here to stay, the current boom has tapped into sources of strength beyond those that contributed to past upswings in economic activity. For instance, the productivity of our nation's workers has grown faster during the last few years than it had for more than two decades before. Meanwhile, the end of the Cold War has permitted the U.S. government to redeploy its expenditures away from defense and toward other productive ventures. In the process, we've shifted from a budget deficit to a budget surplus, releasing resources into the private sector. Finally, good monetary policy, measured by an inflation rate that has been both low and stable by historical standards, has contributed to a policy environment that allows markets to work efficiently.

With the expansion now at historic lengths, should we expect recession around the corner? Stated differently, do economic expansions die of old age? The statistical evidence on this question says no.

One way to illustrate this issue is the following: Suppose you flip a coin five times, and it comes up heads each time. What is the probability of flipping heads on the sixth try? The answer is 50 percent—the first five heads have no influence on the current coin toss.

Similarly, the fact that our economy has expanded for several years in a row now does not increase the odds that we will enter a recession next year. Careful statistical analysis shows that economic fortunes do not depend on the length or timing of past expansions. They depend instead on stable prices and low inflation. Betting on a quick end to our record-breaking expansion might not be a good wager.

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