The 6 major adverse shocks that have hit the U.S. macroeconomy since 2005

Talk to people at the Federal Reserve these days about how they feel about the institution’s performance during the seven very lean years from late 2008 to late 2015, and they tend to be relatively proud of how the institution performed. Almost smug.

Why? Well, let me pull out my old workhorse-graph of the four salient components of U.S. aggregate demand since 1999:

And let me run through the six major adverse shocks to the U.S. macroeconomy since 2005:

(1) The collapse of residential investment after the end of the mid-2000s housing bubble, in order of their size (-3.8% of potential GDP):

(2) The wave of austerity–mostly state-and-local, but considerable at the federal level as well–hitting government purchases (-3.0% of potential GDP):

(3) The collapse of business fixed investment in the aftermath of the financial crisis (-2.9% of potential GDP):

(4) The blockage of the credit channel that prevented there from being much significant bounce-back to normal in residential construction (-1.8% of potential GDP):

(5) The (closely-associated with (3)) collapse of exports as the effects of the financial crisis spread beyond U.S. borders (-1.8% of potential GDP):

And (6) on a different graph (since it is not one of the four salient components), and also closely-associated with (3), the adverse shock to consumption as it became clear first that there was going to be a deep and then a long downturn (-1.8% of potential GDP):

Those at the Federal Reserve these days put to one side (1) the extraordinary failure of foresight that led to the adoption of a 2%/year inflation target that nobody who had any inkling of what 2008-2015 would be like would ever have adopted; (2) truly massive failures of prudential regulation of housing finance and derivatives markets before 2008; and (3) bobbling the initial crisis response in the year starting October 2007. They deeply regret the hysteresis-driven damage to the long-run growth of the economy produced by the Lesser Depression–the physical investments not made, the new business models not experimented with, the organizational destruction unaccompanied by the “creative” part of the Schumpeterian process, the human-capital investments not made, the worker attachments to the labor market lost. And they say: given those six shocks and their magnitude, haven’t we done rather well at stabilizing the economy? Haven’t we certainly done much better than the BoJ, or the ECB, or the Bank of England?

And they are right: they have.

Since late 2008, the Federal Reserve has a lot to be proud of.