‘Protracted’ crisis has its own anomalies

Although no two business cycles are alike, most share some common characteristics.

The interest-rate-sensitive sectors of the economy — housing and manufacturing — tend to lead on the way up and the way down, for obvious reasons. Inflation ebbs during the recession and in the early stages of the recovery. Credit creation drives the upswing.

The recovery from the financial crisis has been different all around, just as Harvard economists Carmen Reinhart and Kenneth Rogoff predicted in their 2009 book, This Time Is Different: Eight Centuries of Financial Folly.

It has been a “protracted affair”, featuring extended declines in asset markets, large contractions in output and employment, and an explosion of government debt: Three characteristics common to the aftermath of financial crises.

Yet even in the context of the typical post-financial-crisis recovery described by Reinhart and Rogoff, this one has some peculiarities of its own.

Let’s start with housing, whose rise and fall and associated debt were the proximate cause of the crisis. Residential real estate pretty much sat out the first two-and-a-half years of the recovery before getting traction in 2012, with a lot of outside help.

The Federal Reserve drove down rock-bottom mortgage rates even more with its purchases of treasuries and mortgage-backed securities, a programme that is ongoing.

The traditional leader was a laggard this time, and improvement has been slow in coming — at least when it comes to construction and sales. Prices of new homes are a different story.

The median sales price of a new single-family home set a record of $271,600 (€203,500) in April, eclipsing the 2007 peak of $262,600.

Another part owes to a greater number of sales of higher-priced homes in more desirable areas of the country.

The rest is clearly a response to demand for limited supply: Inventories are near record lows while single-family starts are about two-thirds lower than their 2006 peak. Prices of existing homes, on the other hand, are still being constrained by foreclosure and short sales, in which the house sells for less than the amount owed the lender.

Before the crisis, home prices hadn’t declined on a national average basis since the Great Depression, which is one reason the Fed was so complacent about the brewing real-estate bubble.

Then there’s inflation, or the lack of it. Inflation in the US is slowing — with and without food and energy prices — four years after the trough.

The Fed’s preferred inflation measure, the personal consumption expenditures price index, was up a scant 0.7% in the past 12 months. Global inflation, as calculated by the IMF, is slowing and stands at 2.9%.

Finally the strength of the US dollar is “rare in a post-crisis setting”, which may say more about the problems in other developed countries, Reinhart said. “Crises are usually coupled with currency crashes in both advanced and emerging economies.”

The anomalies may be small at this point, too small to require an update to eight centuries of data on financial crises. With households on a stronger footing, inflation tame, the dollar behaving, and record new-home prices beckoning builders for more, who knows?

The differences may turn out to be more important to the outlook than the similarities.

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