How Exceptional Was the Economic Environment in the 1990s?

When Alan Greenspan calls the current economic environment exceptional, who are we to argue? Although most professional forecasters are calling for slowing growth through the remainder of this year, and even slower growth next year, the torrid pace from which we are decelerating is still setting post-war records. As economist James F. Smith at the University of North Carolina noted in his recent newsletter, the odds are very high that the pace of economic growth in 2000 will be the best of any year since 1984. If we finish the year with growth in excess of 4 percent (Smith is now forecasting 4.7 percent and he admits he is below the consensus) it will mark 4 consecutive years of growth in excess of 4 percent, "the first time since 1962-1965 that such strong growth has been sustained for so long."

However, it wasn’t this good throughout the past decade. George Bush certainly remembers the recovery that just wouldn’t begin during his presidential campaign in 1992. It turns out that, on average, the 1990s were exceptional by a few measures but undistinguished by most others. Researchers Cletus Coughlin and Daniel Thornton at the Federal Reserve Bank of St. Louis have compiled some interesting statistics with which to compare U.S. economic performance across the past four decades.

The table below shows that the 1990s average real GDP growth of 3.1 percent was identical to the 1980s, lower than the 1970s and much lower than during the 1960s. All four decades experienced at least one recession, and the 1990-91 recession was the mildest. Nevertheless, growth was sluggish until the past 3 to 4 years. We’ve heard much about the remarkable growth in labor productivity during the latter part of the 1990s, but the decade average productivity growth was unremarkable compared to the 1970s and a full percentage point below the 1960s.

Unemployment in the 1990s fell to the lowest point in 30 years, but the average for the entire decade was still higher than for the 1960s. Low inflation was a hallmark of the 1990s, and was about half the average rate during the 1970s and 1980s. However, the 3.0 average inflation rate during the 1990s was higher than 2.3 percent during the 1960s.

So, is there any area in which the past decade stands out? With an inflation-adjusted average return for the S&P 500 of 15.9 % the performance of equity markets was unsurpassed. This achievement was all the more impressive given the strong growth in share prices already experienced in the 1980s. But, Coughlin and Thornton conclude that the real hallmark of the 1990s was the simultaneous stability of both inflation and output growth. Inflation remainded low for an extended period, and output grew slowly but steadily through the decade. They write, "while the decade of the 1990s was not exceptional in terms of average rates of inflation and output growth, it was an exceptionally stable decade."

(average annual percentage change)

Source: Federal Reserve Bank of St. Louis, National Economic Trends, March 2000.