Can U.S. Economic Expansion Last Until 2020?


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The economic expansion that began in the third quarter of 2009 is about to take three stages, two positive, the other negative. The latter is the probability that the recovery will be much closer to the end than the beginning.

On an optimistic note, by the end of this month, the current rise in real gross domestic product will have survived eight years, making it the third longest of 12 expansions since the late 1940s. Only two have lasted longer: the expansion of the 1960s (eight and three-quarters) and that of the 1990s (10 years). At age eight, the current expansion will have lasted two years longer than the previous one, which ended at six.

Another positive step concerns the growth premium resulting from greater longevity. By conventional measurements, this expansion was the slowest of the 12 (see graph). Annual gains in real gross domestic product over the eight years will have averaged only 2.1%, even assuming the consensus of Blue Chip forecasters is correct in putting the current quarter’s expansion to a clip. 3.0% annual rate. The eight-year average is well below the 2.8% of the previous expansion.

But longevity can make the difference, as a game that lasts longer provides more time to gain traction. In the six years of the previous expansion, which ran from the first quarter of 2002 to the fourth quarter of 2007, real GDP rose 18.0%. But even if the Blue Chip consensus exceeds and annual growth reaches, say, 2.6%, instead of the expected 3.0%, real GDP over the past eight years will have grown from 18.2% to 18.2%. 3%.

Thus, by dint of having lengthened the tooth by two years, this expansion was ahead of the previous one in terms of percentage of total growth.

One of the main reasons we get this result is that the 2002-07 expansion was also relatively slow.

For example, in the first six years of the 1990s expansion, real gross domestic product grew 22.1%. But since a recession doesn’t look likely over the next few quarters, this period of slow but steady growth should take a few more points before finally stopping.

TALK ABOUT CASH, the average duration of the last 11 expansions was not quite five years. So at eight years old, he already seems to be living on borrowed time. But if records are meant to be broken, then two years from now, in the second quarter of 2019, the current expansion could advance further, tying the previous 10-year record.

But could it last more than 10 years?

Carsten Valgreen, senior economist at Applied Global Macro Research, cites a helpful guide to timing. He points out that with each expansion, the profit margins of non-financial companies increase and then begin to decline. It also calculates that, in past cycles, the onset of a recession has occurred no later than five years after the peak of these margins.

This time around, the peak occurred in the third quarter of 2014. So let’s apply this five-year rule and even give it an extra year for the maximum latitude. The result: a record 11-year expansion, with a recession starting in the third quarter of 2020. And as it turns out, the third quarter of 2020 would coincide with the nomination period just before the next presidential election.

Not that none of these calculations are meant literally. They are only meant to demonstrate that, unless all the rules of the past are broken, the current expansion has most likely entered its fall season. The chances of the onset of another winter of recession, in which gains in gross domestic product are reversed by the contraction, will increase over the next two to three years.

It may be unrealistic to expect that the contraction this time around will not be as severe as the Great Recession of 2008-09. But so far, at least, it looks like no current bubble or financial excess is so severe that it needs a major correction. This, in part, could be perversely attributed to the low growth rate.

Are the ups and downs of the business cycle an inevitable feature of unfettered capitalism? I would say no. But that doesn’t change the outlook for the real world. For investors, workers and consumers, hard times do not seem far away.

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