‘Oddly’ Expanding the Capacity of the Economic Expansion?

Given its untapped potential, the economy during the next couple years may still prove more robust and durable than most currently imagine.

Normally as an economic expansion matures, its capacity to grow diminishes. Resources – both labor and capital – become more fully employed and scarce, limiting additional expansion opportunities. The supply of factory capacity and commercial space becomes inadequate for persistent growth. Productivity typically wanes as the economic recovery ages, excess liquidity holdings get spent, balance sheets become compromised, and policy officials begin tightening conditions to ward off overheating worries.

Today, however, despite the economic recovery being five and one-half years old and imminent recession fears commonplace, the economy’s capacity to grow has oddly been “improving” on several fronts. Perhaps this may allow the contemporary expansion to last much longer than most currently anticipate. Should the Fed soon embark on a new easing campaign, the economic expansion may suddenly look much younger and perhaps exhibit some of the character usually only seen at the beginning of a new expansion, not in a middle-aged or old recovery.