There’s much to be said for normality in the US economy

Steady and solid growth – rather than boom and bust – shows a welcome return to stability

Share

There is a spring in the step of the US economy, and it has to do not just with the better data coming through, but with a wider sense that the country is returning to “normal”. That is, normal interest rates, normal growth and normal levels of unemployment.

You have to be cautious when trying to pin down anything so nebulous as economic sentiment, but one recent shift is significant. It concerns the assurance that Janet Yellen, the new chair of the Federal Reserve Board, has given people that the Fed will, so to speak, do the right thing. She gave her first press conference here in Washington nearly two weeks ago, noting that interest rates would stay low for a considerable period after the Fed stopped its monthly purchase of treasury debt. When asked how long this might be, she said it might be “around six months or that type of thing”.

The initial reaction of one of shock – gosh, that means rates will start to go up about March next year rather than six months later as previously expected – and markets plunged. But since then there has been a reassessment. People have looked at the totality of what she said together with the Fed’s opening statement, instead of picking on one remark. Taken overall, this is that the Fed would continue with an exceptionally loose monetary policy for a while yet, but eventually policy would return to normal. The pace would be determined by the pace of the economy, and not triggered by a specific number such as the unemployment rate.

Put that way, what the Fed was seeking to do looked rather sensible – and, consequently, Ms Yellen appears rather sensible too. The return to normal interest rates is seen more as a signal that the economy is indeed back to normal than something to be feared.

But what is normal? The years up to the global financial crisis have come to be dubbed the “great moderation”. The developed world had periods of boom and bust but the magnitude of the swings seemed to be decreasing. Gordon Brown took some stick for claiming that Labour had eliminated “Tory boom and bust”, but if you take out the politics, his hubris mirrored that of the bankers who assumed that big swings in the economy would not occur again. We know now how wrong both were, and most of us assume that there will be big swings in the economy, here in the US as well as elsewhere, in the future. The new normal, it is widely argued, will be different from the old normal.

That may turn out to be right, but people in the US are beginning to wonder whether another period of the great moderation may have already begun. The most developed version of this argument has just been produced by the global economics team at Goldman Sachs. Their argument is that between 1984 and 2007, volatility fell in most of the developed world. It certainly happened in the US, but it also occurred in the UK. The early 1990s recession was not as bad as the early 1980s one, and the early 2000s downturn was not technically a recession at all. Then everyone became complacent and made huge errors of judgement, with the results we all know.

Now, the Goldman team argues, stability has returned. The data for the past three years shows that US employment has grown more steadily than at any time for the past 50 years. Consumption in the US had grown equally steadily. If this is right, the US will have several years of steady growth. One of the effects of tightened regulation in the banking sector will be to restrict the extent to which companies and households increase their borrowings. So the dangers of a boom getting out of control are much less. On the other side, we are less likely to plunge into a slump because the authorities have shown they will act to check that. After all, that is what the Fed has done and is committed to continuing. Janet Yellen made that quite clear.

I find this argument quite convincing. There has been much concern on both sides of the Atlantic about the quality of the recovery: that it is weaker than that of previous cycles and that it has been sustained only by the artificial stimulus of QE, which brings other problems. Those are reasonable worries and will continue until such time as living standards have recovered to their previous levels. There is a further concern. Lower volatility – not so high booms and not so deep slumps – does not of itself mean faster long-term growth. It may make it easier to sustain solid growth, and socially it is highly desirable. Not many people think boom and bust is a great way to run things.

Nevertheless, an America that grows steadily for the next four years would become a locomotive for the rest of the developed world. Goldman forecasts growth at or about 3 per cent through to the end of 2017 for both the US and UK. If that turns out to be the new normal, normal sounds OK to me.

React Now

Latest stories from i100
Have you tried new the Independent Digital Edition apps?
iJobs Job Widget
iJobs General

Marketing Manager - Central London - £45,000-£55,000 + bonus

£45000 - £55000 per annum + bonus: Ashdown Group: The focus of this is to deve...

Application Support - Enterprise Java, SQL, Oracle, SQL Server

£45000 - £55000 per annum: Harrington Starr: A well-established financial soft...

Service Desk Analyst (Graduate, Helpdesk, Desktop, Surrey)

Negotiable: Harrington Starr: Service Desk Analyst (Graduate, Helpdesk, Deskto...

Service Desk Analyst (Graduate, Helpdesk, Desktop, Surrey)

Negotiable: Harrington Starr: Service Desk Analyst (Graduate, Helpdesk, Deskto...

Day In a Page

Read Next
 

August catch-up: architecture, suitcases and ‘pathetic figures’

John Rentoul
Mosul dam was retaken with the help of the US  

Air strikes? Talk of God? Barack Obama is following the jihadists’ script after James Foley beheading

Robert Fisk
Air strikes? Talk of God? Obama is following the jihadists’ script

Air strikes? Talk of God? Obama is following the jihadists’ script

The President came the nearest he has come yet to rivalling George W Bush’s gormless reaction to 9/11 , says Robert Fisk
Ebola outbreak: Billy Graham’s son declares righteous war on the virus

Billy Graham’s son declares righteous war on Ebola

A Christian charity’s efforts to save missionaries trapped in Africa by the crisis have been justifiably praised. But doubts remain about its evangelical motives
Jeremy Clarkson 'does not see a problem' with his racist language on Top Gear, says BBC

Not even Jeremy Clarkson is bigger than the BBC, says TV boss

Corporation’s head of television confirms ‘Top Gear’ host was warned about racist language
Nick Clegg the movie: Channel 4 to air Coalition drama showing Lib Dem leader's rise

Nick Clegg the movie

Channel 4 to air Coalition drama showing Lib Dem leader's rise
Philip Larkin: Misogynist, racist, miserable? Or caring, playful man who lived for others?

Philip Larkin: What will survive of him?

Larkin's reputation has taken a knocking. But a new book by James Booth argues that the poet was affectionate, witty, entertaining and kind, as hitherto unseen letters, sketches and 'selfies' reveal
Madame Tussauds has shown off its Beyoncé waxwork in Regent's Park - but why is the tourist attraction still pulling in the crowds?

Waxing lyrical

Madame Tussauds has shown off its Beyoncé waxwork in Regent's Park - but why is the tourist attraction still pulling in the crowds?
Texas forensic astronomer finally pinpoints the exact birth of impressionism

Revealed (to the minute)

The precise time when impressionism was born
From slow-roasted to sugar-cured: how to make the most of the British tomato season

Make the most of British tomatoes

The British crop is at its tastiest and most abundant. Sudi Pigott shares her favourite recipes
10 best men's skincare products

Face it: 10 best men's skincare products

Oscar Quine cleanses, tones and moisturises to find skin-savers blokes will be proud to display on the bathroom shelf
Malky Mackay allegations: Malky Mackay, Iain Moody and another grim day for English football

Mackay, Moody and another grim day for English football

The latest shocking claims do nothing to dispel the image that some in the game on these shores exist in a time warp, laments Sam Wallace
La Liga analysis: Will Barcelona's hopes go out of the window?

Will Barcelona's hopes go out of the window?

Pete Jenson starts his preview of the Spanish season, which begins on Saturday, by explaining how Fifa’s transfer ban will affect the Catalans
Middle East crisis: We know all too much about the cruelty of Isis – but all too little about who they are

We know all too much about the cruelty of Isis – but all too little about who they are

Now Obama has seen the next US reporter to be threatened with beheading, will he blink, asks Robert Fisk
Neanderthals lived alongside humans for centuries, latest study shows

Final resting place of our Neanderthal neighbours revealed

Bones dated to 40,000 years ago show species may have died out in Belgium species co-existed
Scottish independence: The new Scots who hold fate of the UK in their hands

The new Scots who hold fate of the UK in their hands

Scotland’s immigrants are as passionate about the future of their adopted nation as anyone else
Britain's ugliest buildings: Which monstrosities should be nominated for the Dead Prize?

Blight club: Britain's ugliest buildings

Following the architect Cameron Sinclair's introduction of the Dead Prize, an award for ugly buildings, John Rentoul reflects on some of the biggest blots on the UK landscape