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Each quarter I try to present a perspective on where the economy stands and where it is most likely heading, with an emphasis on the implications for bank deposits. This quarter, with the Fed’s recent rate cut, we have more clarity about where we stand. In contrast, recent announcements on tariffs and fiscal policy changes create substantial additional uncertainty about where we are heading.
Historically, my primary focus has been on monetary policy and its implications for inflation, interest rates, and deposits. This quarter we will start by considering two topics potentially having major long-term impacts even though their short-term impacts likely will be limited. Both issues have featured prominently in election-related news. They are (1) imports, the balance of payments and tariffs, and (2) the federal government deficit and implicitly taxes and government expenditures. Both are highly charged politically, and neither has been well handled by the press.
Today I will start with a somewhat different perspective on the U.S. history of GDP. Typically we examine the level of GDP and how it compares with potential GDP. Chart 1, instead, presents the annual growth rate in GDP over the longest range possible. Why the change? Emphasize two points. First, the graph suggests that in the post-WWII era, we have maintained a roughly constant rate of growth in GDP, roughly 2.5 percent. And second, the variability in the growth rate has declined dramatically. In the last 40 years, we have had 4 recessions. In the prior 40 years, we had 8 recessions. Recessions appear to be about equally long over the entire period, on average slightly less than 1 year, but expansions have more than doubled in length, from less than 4 years to about 8.5 years.
