Capital Properties FX
Capital Properties FX

History of US GDP

The foreign exchange market is getting ready for the summer. Usually, it means lower volatility and incredibly boring trading days. Ranging price action is the keyword here. However, before the “summer trading conditions” totally take over, we still have a couple of risk events ahead of us. The first is the upcoming ECB presser and the second is the highly awaited FED meeting. Taking into account that the Federal Reserve is more influential, let’s keep our focus on them by looking at the history of US GDP.

“Britain’s broke; it’s your money we want.” – Lord Lothian to American journalists, 1940

The current quarterly growth rate of the United States’ economy is making investors nervous. The problem is that it’s too slow. On the 14th June, ideally, the FED should hike the rates by another 0.25 percent. According to different sources, the market has priced in about 80 percent of the expected rate increase. However, the slowing pace of the economic growth has created a fair amount of uncertainty.

When one looks at the history of US GDP, focusing on the quarterly figures, a problem emerges. Back in 2004 when the FED started to lift the federal funds’ rate from 1.0 percent, the quarterly growth pace in the States was firmly above 3 percent. Today, we are miles away from such numbers. Indeed, the Q1 of 2017 was revised higher last Friday (to 1.2%) but regardless, it’s still relatively weak.

Read Also: Janet Yellen – Rate Hikes After May’s Core CPI?

World War 2 & the United States Economy

Before the war began in 1939 the world was going through a tough period. The Great Depression was sweeping across the globe. The effects of the economic downturn in the United States were dismal. In 1930 the yearly GDP growth rate was -8.5% followed by two years of additional pain of -6.4% and -12.9% respectively. In 1934 the situation started to stabilize but things were far from rosy. When World War II erupted in 1939, the United States was still in recovery mode.

However, during the war years, everything changed for the United States. As war and destruction spread throughout Europe, the U.S. was restructuring its economy. The American government prepared its citizens for war. The manufacturing sector was reorganized to produce weapons rather than everyday goods. American allies, such as Great Britain, were in desperate need of ships, ammunition, weapons and supplies in general.

The chart above, reflecting the history of US GDP, shows the expansion rate of the US economy during the war period. The growth rate exploded from -3.3% in 1938 to +8.0 percent in 1939. During the following years, the United States’ economy only kept on growing at elevated pace. At a macroeconomic scale, the war ended the Great Depression in the United States. Wartime industrial expansion brought the US economy to a completely different level compared to its allies or enemies.

Era of Zero Interest Rate Policy

From 1980 to 2008 the average yearly GDP growth rate in the US stood at 2.9 percent. During that period the Ronald Reagan era was perhaps the most impressive. However, the US debt also skyrocketed under his administration. Nevertheless, in the period of 28 years, the United State’s economy grew on average at almost 3% per year. All that disappeared in 2009.

When the financial crisis hit the markets, the central banks acted quickly. The Federal Reserve was the first to introduce zero interest rate policy and a QE program. After seven years of ZIRP and other unconventional monetary policy tools, the FED hiked the rates. The long awaited rate hike took place in December 2015. Though rates are slightly higher today we are still very close to zero interest rate policy.

After years of extremely accommodative monetary policy, the US economy hasn’t returned to growth levels we saw between 1980 and 2008. Since the crisis, the United States’ economy has grown on average 1.48% per year. The GDP growth pace is now basically 50% slower.


The United States became a superpower during World War II. History of US GDP clearly shows that the growth rate never returned to the figures seen between 1939 and 1943. Nevertheless, the US has maintained its position as the largest economy in the world ever since. Good old-fashioned manufacturing ended the Great Depression in the US and made it what it is today.

The 2nd “Great Depression” that started in 2009, hasn’t been fixed that successfully. The US recovery since the financial crisis has been slow. Perhaps it has something to do with the fact that today, the United States is a service based economy. Manufacturing is almost completely secondary. Or maybe, the FED’s policies haven’t been as successful as hoped.

Given the slow recovery during the recent years, it’s possible that the FED’s tightening cycle won’t last very long.

Capital Properties FX
May 30, 2017

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Related Readings
The U.S government, always skeptical: Ralph A. Young, memorandum to William McChesney Martin, August 25, 1961
Losses in Texas: FDIC Division of Research and Statistics, “History of the Eighties, vol. 1, An Examination of the Banking Crises of the 1980’s and early 1990’s“, 183