The U.S. economy hit bottom in June 2009 and has been growing slowly but surely ever since, according to the National Bureau of Economic Research’s Business Cycle Dating Committee. In just a few months, the current expansion could soon become the longest in American history, beating the previous record from March 1991 to March 2001.
That’s not necessarily good news. The risk of recession tends to rise over time because prolonged periods of growth encourage risky behaviors. People who have forgotten the fear of joblessness and the pain of falling asset prices are more willing to take out big debts and less willing to maintain an adequate buffer of emergency savings. Businesses used to steadily rising sales will keep investing in additional capacity until they end up with excess inventories they can’t sell.
These unwise choices are enabled by traders and bankers primed to wonder whether recessions are a thing of the past after years without significant losses. Skeptics often find themselves benchmarked against believers that “this time is different” and feel compelled to bid up valuations accordingly. Eventually, growth becomes dependent on unsustainable patterns of spending based on perpetually rising asset prices, dissaving, and overinvestment. It doesn’t take much for the entire process to swing into reverse.
The question is whether this describes the U.S. economy today. Pessimists can point to plenty of reasons to worry the current expansion may not last much longer. While housing is recovering from its 2018 slump, industrial production, retail sales, and applications for unemployment benefits are all implying a slowdown. The Federal Reserve’s latest survey of senior loan officers indicates that banks have been tightening lending standards and that demand is falling across all major credit categories.
In April, more than 83% of chief financial officers surveyed by Duke University said they believe the U.S. will have entered a recession by the beginning of 2021. That belief could become self-fulfilling if companies cut their capital spending. The latest IHS Markit composite survey of American businesses, released on Thursday, warns that while output is still growing, “the rise in new business in May was the softest recorded since the series began in October 2009” and that “business expectations fell to their lowest since the series began in July 2012.” Among manufacturers, “new orders declined for the first time since August 2009.”
Fortunately, a downturn is not inevitable. In fact, there are good reasons to think the current expansion could last at least another 10 years—under the right circumstances. Somewhat perversely, the best reason for optimism is the depth of the scars of the global financial crisis. Saving rates are higher and indebtedness is lower than at any point since the mid-1990s. Americans are far less willing to boost their spending in response to rising asset prices than in the past. The job market also has plenty of room for improvement, with the employment rate of working-age adults well below its level in the 1990s.
The experience of other countries is also encouraging. While the longest U.S. expansion in history lasted only 10 years, many other rich countries have experienced far longer booms since 1960, including Australia, Austria, Belgium, Canada, Denmark, Finland, France, Greece, Iceland, Ireland, Japan, South Korea, Norway, Spain, Sweden, and the United Kingdom. According to the Organization for Economic Cooperation and Development, Australia has the longest sustained expansion on record, at 28 years. They have not had a proper recession since 1991.
Intriguingly, this sustained expansion has not boosted Australian living standards relative to the rest of the world. Output per working-age adult increased just as much in the Netherlands and in Sweden as in Australia during its long boom. Finland and New Zealand did a bit better, and South Korea did phenomenally better, despite two massive financial crises. Australia missed the global financial crisis and the euro crisis, yet living standards in Germany, Japan, South Korea, the Netherlands, New Zealand, Sweden, and the U.S. have improved more since 2007. By this measure, even Portugal and Spain, which were brutalized by the euro crisis, have done almost as well as Australia since 2007.
Avoiding recessions is good, but not enough.
|For more news you can use to help guide your financial life, visit our Insights page.|