On Friday, October 14, while speaking at the 60th Economic Conference held by the Federal Reserve Bank of Boston, its president, Eric Rosengren, said the U.S. economic recovery after “The Great Recession” had been unusually weak and could create problems ahead.
What’s so unusual about the recovery after The Great Recession? Rosengren provided three big reasons, saying, “First, during this recovery, growth in real GDP has been quite subdued – with growth rates that are percentage points slower than the historical average. Second, despite the tepid growth, the unemployment rate has fallen quite a bit faster than many expected. And finally, inflation has lingered stubbornly below the Federal Reserve’s inflation target of two percent.” (Source: “After the Great Recession, a Not-So-Great Recovery,” Federal Reserve Bank of Boston, October 14, 2016.)
Comparing previous recoveries to the current recovery, the president of the Federal Reserve Bank of Boston said, “Despite the only gradual increase in real GDP, the unemployment rate has fallen faster than in the previous two recoveries. Given the slower growth, this is somewhat surprising.”
Rosengren explained further: “Given the unusually high unemployment rate coming out of The Great Recession, this more rapid decline in unemployment was certainly welcome – but the pairing of slower, sustained real GDP growth with a rapid decline in the unemployment rate is one of the clear puzzles of the recovery.”
Regarding interest rates, he said, “Reflecting the depth of The Great Recession, the real federal funds rate has been significantly lower, and consistently negative, in contrast to the two earlier recoveries. The need for more monetary policy accommodation is not surprising, given the severity of the recession. What is surprising, however, is that even near full employment, the real rate is still so much lower than in the earlier recoveries.”
Rosengren also focused on asset prices. He argued that price-to-earnings (P/E) ratios for stocks and price-to-rent for residential real estate are only somewhat elevated. But, he also mentioned they remain well below the previous peaks.
He concluded by saying, “This recovery has been full of surprises, most of which have not been good.” Rosengren also questioned if the anomalies currently in place would remain and what kind of impact they could have on the U.S. economy.