No tell-tale signs of recession as US economic expansion nears record high

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The United States is on track to break the record for the longest economic expansion of all time – and there’s hardly a hint of a recession on the horizon.

The economy has been growing steadily since mid-2009, and the duration of the current expansion will reach 104 months by the end of February. In May, the current growth phase will surpass a 106-month expansion in the 1960s and take second place.

By next summer, the United States will break the 120-month record set in the 1990s.

Can the good times come to an abrupt end? It’s still possible – there’s no guarantee against recession – but the tell-tale signs of trouble seem entirely absent.

Recessions happen for one of three reasons, according to BMO Capital Markets senior economist Sal Guatieri.

• Individuals and businesses accumulate too much debt.

• Investors drive asset values ​​well beyond a reasonable level.

• Shortages of raw materials and labor lead to higher inflation and interest rates.

The Great Recession of 2007-2009 was so bad, Guatieri wrote in a new report, because all three things happened.

And now? The first warning sign is practically invisible. Household and corporate debt levels are below historical norms.

Some kind of bubble bursting and taking the economy with it doesn’t seem to be in the cards either, especially after the recent pullback in US stock markets.

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“A sustained correction in asset prices is a bit bigger risk, but probably only if the value of equities and real estate rises sharply again,” argues Guatieri.

That leaves inflation and interest rates rising, the usual trigger for a recession.

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Price pressures have been contained for years, but lately the pace of annual inflation has resumed its upward march, and it could top 2% later this year using the Federal Reserve’s favorite PCE gauge. Businesses complain that they cannot find skilled labor and the cost of essential raw materials such as oil has increased.

The threat of higher inflation and a Fed raising U.S. interest rates more aggressively is what prompted a strong sell-off in stocks that began in late January and continued through mid-February. Higher interest rates pull money from stock markets.

Yet hardly anyone thinks inflation will spin out of control and exceed the Fed’s 2% target this year. Even the Fed is uncertain about the subdued behavior of inflation over the past few years. He wants more evidence that prices are rising faster than expected before he slams on the brakes.

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“In all likelihood, the current expansion will come to an end because of the usual suspect: a significant rise in inflation and interest rates,” Guatieri concluded. “But not this year.”

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