Why the Expansion of the 1990's Lasted So Long
by Bill Voyce
Published Aug-21-2006
The 1990's Expansion
The economic expansion of the 1990's was unique in both duration and character. It was the longest in modern history; extending from March 1991 to March 2001 and it spanned a full ten years�a year and two months longer than the previous record holder (which began in February 1961 and ended in December 1969). Moreover, this current expansion was preceded by a relatively short (and mild) recession of only eight months duration, which in turn had been preceded by the (at that time) longest peacetime expansion in history, extending from November 1982 through July 1990. Thus, except for the recession of July 1990 through March 1991, the U.S. economy had been expanding almost continuously for more than eighteen years.
The Uniqueness of the 1990's
No two recessions are exactly alike, and the same may be said of recovery periods. Each has its own causes and special characteristics, and the expansion of the 1990's was no different. The most striking characteristic of the first half of the recovery, following the trough of March 1991, was its very ordinariness; GDP rose at less than 3.5 percent per year for the period 1992-1996. However, for the years 1996 through 2000, the average GDP increase was 4.4 percent per year�a full percentage point higher. It is this second half of the 1990's expansion that is the key to its character.
What kept the recovery going past 1995, and, indeed, accelerated it as it moved toward the end of the twentieth century and on into the new millennium? First, it was a period of relatively low inflation. When inflationary pressures begin to heat up, this usually leads to higher interest rates, which, if overdone, can discourage investment borrowing and result in a slowing of economic growth. On the other hand, when inflation is under control, as was the case in the late 1990's, interest rates can be left alone for the most part, and the economy can thrive.
The second factor that helped prolong the expansion was the balancing of the budget in 1998 and the budget surpluses of 1998 through 2000. The surplus for fiscal 1998 was $69.2 billion, and this amount increased year by year; in fiscal 1999 it was $122.7 billion; and in fiscal 2000 it was $230 billion. Less government borrowing led to a business climate where more resources could conceivably be available for business investment, and this, coupled with the lower interest rates associated with a low-inflation economy, resulted in a continued upswing throughout most of 2000.
A third factor driving the economy in the late 1990's was a pattern of strong and sustained consumer spending, fueled by relatively low unemployment rates and healthy job growth. After reaching 7.5 percent in 1992, unemployment dropped every year thereafter, falling to a low of 4.0 percent in 2000; employment, on the other hand, grew at an average of 2.4 percent a year between 1992 and 2000. A strong jobs picture, relatively low unemployment, and continued gains in real disposable income throughout the period all contributed to consumer confidence and a willingness to spend. And since consumer spending accounts for about a third of the total GDP in any given year, this was undoubtedly a major factor in the continued upswing of the economy.
It is important to realize that all of these factors, working in concert, were responsible for the continued and accelerating expansion of the economy for a second five years. However, at the same time, if one characteristic should be given pride of place above the others, it would probably be the low inflation of the period, as mentioned above. This fact allowed interest rates to remain relatively low, which in turn encouraged business growth.
The End of an Era
Yet there were clouds on the horizon as the nation entered the new millennium. In December 2000 the New York Times published an article entitled "Exposing the Fraying Edges in the Fabric of the Economy," in which it asked four business writers for their opinions in regard to where the economy might be heading in 2001. And in February 2001, in its semiannual Monetary Report to the Congress, the Federal Reserve Board admitted that as early as July of the preceding year, "tentative signs of a moderation in the growth of economic activity were emerging following several quarters of extraordinarily rapid expansion." The Report further acknowledged that
"Indications that the expansion had moderated from its earlier rapid pace gradually accumulated during the summer and into the autumn � The dimensions of the economic slowdown were obscured for a time by the usual lags in the receipt of economic data, but the situation began to come into sharper focus late in the year as the deceleration steepened."
What, then, brought the expansion to a halt? Economists are generally agreed that the recession was a direct result of the expansion itself�or, at least, certain aspects of it. "In other words," writes economist Eric Lundin, "the U.S. economy was a victim of its own success." By the fourth quarter of 1999, for example, GDP was rising at an annualized rate of 8.3 percent�more than twice the average of the entire recovery period. Such an overheated rate of growth could not possibly sustain itself for long. Durable goods orders began to fall in early 2000, a sign that consumers were beginning to be a little more circumspect about purchasing big-ticket items; a decline of 6.4 percent was registered in April 2000�the largest since 1991�followed by an even steeper drop of 12.4 percent in July, and a third decrease of 5.5 percent in October. This led inevitably to a sudden decline in stock prices.
Stock prices had been increasing steadily for several years, though much faster than the concomitant gains in earnings would have warranted. The price-to-earnings ratio of the Standard & Poor's 500 Index reached an all-time high of 44 in December 1999, surpassing the previous all-time high set in 1929. (The historical average had been around 15.) By the spring of 2000, the ratio had begun to plummet downward once again to a more historical level, but it was still at 21.2 as late as February 2003.
With orders for big-ticket durable goods falling almost every month, manufacturers found themselves saddled with excess inventory, as well as excess production capacity. By the fall of 2000 manufacturing production and employment began to be cut, and within a few months the entire economy was officially in a recession.
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