The growth rate since the crisis has averaged one-quarter to one-half the average since World War II, depending on the measure used. While the recent lower-than-average economic performance is partly attributable to the financial crisis, it has persisted into the current expansion. Growth was more volatile during this period, with more frequent recessions, but on average was higher. This deceleration is likely not being driven solely by the Great Recession—GDP growth has not shown sustained acceleration at any point, remaining below 3% in each calendar year of the current expansion. What Has Caused Slow Growth Since 2008? As the expansion nears completion of its seventh year since the recession and continues to experience slower-than-average growth, economists have offered a number of explanations for the relatively slow recovery. Slow growth in the immediate aftermath of the crisis could be attributed to deleveraging and financial disruptions caused by the crisis, but those problems were of a temporary nature. Permanent damage from the crisis, called hysteresis , would be expected to leave the level of GDP permanently lower, but should not affect the long-term growth rate. Subsequent shocks to the economy during this expansion, called headwinds , could also be temporarily holding back growth, but over time, there is no reason to think that unlucky events would continually outweigh lucky ones. Secular stagnation is an explanation for the slowdown of a more long-lasting nature, but is distinct from an explanation based on changes in the structural factors that are the sources of long-term growth. An explanation based on structural factors would suggest a more permanent slowdown. As the duration of the slowdown persists, explanations based on temporary factors become less compelling and permanent factors become more compelling—particularly as the labor market approaches full employment. It should be noted that while this report presents these explanations as distinct and contrasting, they are not mutually exclusive, and some economists combine elements from more than one in their diagnoses. While hysteresis may have been the dominant cause of weakness early in the recovery, the longer the growth slowdown persists, the less it can be explained by hysteresis. This decrease in unemployment is problematic, because it is difficult to explain why the economy has been able to return to near full employment in spite of slow growth if the slow growth is caused by secular stagnation. These headwinds include
the rise in oil and other commodity prices from 2009 to 2011, which reduced real U.S. incomes for commodities of which the United States is a net consumer; the European economic crisis, beginning in 2009, which reduced demand for U.S. exports and caused financial instability abroad; more recently, the deterioration in financial conditions and lower or negative economic growth in emerging markets, most notably China, which also has reduced demand for U.S. exports and caused the dollar to appreciate against most emerging currencies; fiscal contraction at both the state and federal level in the United States, which in GDP accounting terms reduced overall growth by about half a percentage point each year from 2011 to 2013, and did not start contributing to growth again until 2015; the effects of policy uncertainty on financial market volatility and consumer confidence, following events such as the 2011 debt limit impasse, the "fiscal cliff" at the end of 2012, and the 2013 debt limit impasse/government shutdown; and the effects of business and household deleveraging, discussed below. There is no systematic attempt to identify headwinds beforehand or search for positive "tailwinds" that might offset the headwinds. (Growth attributed to human capital did not slow, but growth in the labor supply did, so that, on net, labor contributed to the growth slowdown.) In terms of why the growth rate of all three factors has declined, the key question is whether this pattern is caused by long-term structural factors that are independent of the financial crisis or whether their decline was caused by the financial crisis or some other demand-side phenomenon—implying that the growth rate of each will bounce back. The aging of the population is the most easily identifiable factor that can explain the slowdown in at least some of the growth in the labor supply. Investment. When there has been a long-lasting change, it has largely been because of changes in productivity growth.
Between 2008 and 2015, economic growth has been, depending on the indicator, one-quarter to one-half the long-term average since World War II. Economic performance has been variable throughout the post-war period, but recent growth is markedly weaker than previous low growth periods, such as 1974 to 1995. Initially, slow growth was attributed to the financial crisis and its aftermath. But even after the recession ended and financial conditions normalized, growth has remained below average in the current economic expansion. The current expansion has already lasted longer than average, but growth has not picked up at any point during the expansion. By some indicators, growth began to slow during the 2001 to 2007 period, while other indicators suggest that the slowdown is more recent and abrupt. Although this report focuses on the U.S. economy, the same pattern has occurred across other advanced economies.
Economists have offered a number of explanations at various points for the relatively slow recovery. These explanations are not necessarily mutually exclusive, and some economists combine elements from more than one in their diagnoses.
Slow growth in the immediate aftermath of the crisis could be attributed to deleveraging (debt reduction) by firms and households and financial disruptions caused by the crisis, but those problems were of a temporary nature. There is historical evidence that recoveries are slower after financial crises.
Permanent damage from the crisis, called hysteresis, would affect the subsequent recovery. For example, if long-term unemployment resulting from the crisis eroded workers' skills, it could be more difficult for them to find a job when the labor market has recovered. This factor was of greater importance early in the recovery and of waning importance as the recovery continues because it would be expected to leave the level of GDP permanently lower, but should not affect the long-term growth rate.
Subsequent shocks to the economy during the expansion, called headwinds, could also be temporarily holding back growth. Headwinds identified at various points in the expansion include high energy prices, the European economic crisis, the emerging market slowdown, fiscal contraction, and fiscal policy uncertainty. Headwinds can be easy to identify after the fact, but there has been little systematic attempt to determine whether there have also been offsetting tailwinds or whether recent headwinds have been relatively larger than in the past.
Secular stagnation is an explanation for the slowdown of a more long-lasting nature that posits, atypically, this expansion cannot generate a healthy pace of economic activity on its own, even with the help of aggressive monetary stimulus. This explanation has focused on persistently low interest rates and low inflation as keys to understanding what has held back growth. This explanation struggles to explain the recent return to nearly full employment, however.
An explanation based on structural factors would suggest a more permanent slowdown. This explanation looks at long-term shifts in the sources of long-term growth—growth in labor supply and quality, investment, and productivity. For example, the aging of the population has reduced the growth rate of the labor supply. While it is unlikely that slow growth is being driven solely by structural factors—that would imply the timing of the financial crisis and onset of the growth slowdown was purely coincidental—the longer that slow growth persists, the more it can be attributed to structural factors.
As the duration of the slowdown persists, explanations based on temporary factors become less compelling and permanent factors become more compelling—particularly as the labor market approaches full employment.