In the past three years, the most noteworthy aspect of the US recovery has been its weakness. The headwinds arising from the 2008 financial collapse, especially against household finances, housing and lending, have held annualised growth at the meagre 1.7 per cent rate we saw in the last quarter. They have prevented an improvement in the labour market, as evidenced by the recent 30-year low in the proportion of the workforce in employment. These headwinds are now beginning to abate but it may be another four years before they fully subside.
But when they do, it is possible that the US economy will surprise on the upside. A housing revival, the revolution occurring in energy, a rejuvenated banking system and a leaner industrial base could lead to US growth beyond the 2.5 per cent rate that is widely seen as its long-term potential. In other words, the famine could be followed by a feast.
There are precedents for such a growth spurt. We saw it in the recovery from the deep 1981-82 recession and over the latter half of the 1990s. True, those periods were not preceded by a financial collapse. But they did not involve a monetary response as powerful as that unleashed by the US Federal Reserve in 2008 and 2009. There are now serious forecasts, for example from the International Monetary Fund and The Conference Board, which suggest the annual growth rate may reach 3-4 per cent within five years.