The US economy bottomed out in June 2009 and has been growing slowly but steadily 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, breaking the previous record from March 1991 to March 2001.
This is not necessarily good news. Recession risk tends to increase over time as prolonged periods of growth encourage risky behavior. People who have forgotten the fear of unemployment and the pain of falling asset prices are more willing to take on large debts and less willing to maintain an adequate reserve of emergency savings. Companies accustomed to ever-increasing sales will continue to invest in additional capacity until they find themselves with excess inventory that they cannot sell.
These imprudent choices are enabled by traders and bankers willing to wonder if recessions are a thing of the past after years without major losses. Skeptics often find themselves compared to those who believe “this time is different” and feel compelled to raise valuations accordingly. Ultimately, growth becomes dependent on unsustainable spending patterns based on perpetually rising asset prices, dissaving and overinvestment. It doesn’t take much for the whole process to flip in reverse.
The question is whether this describes the US economy today. Pessimists can cite many reasons for fearing that the current expansion will not last much longer. As housing recovers from its 2018 slump, industrial production, retail sales and jobless claims all imply a slowdown. The Federal Reserve’s latest survey of senior loan officers indicates banks have tightened lending standards and demand is down across all major credit categories.
In April, more than 83% of CFOs surveyed by Duke University said they believe the United States will be in recession by early 2021. This belief could become self-fulfilling if companies cut their capital expenditure. The latest IHS Markit composite survey of U.S. businesses, released on Thursday, warns that while output continues to grow, “the rise in new business in May was the weakest since the series began in October 2009″ and that ” business expectations have fallen to their level”. the lowest since the start of the series in July 2012.” Among manufacturers, “new orders fell for the first time since August 2009”.
Fortunately, a slowdown is not inevitable. In fact, there are good reasons to believe that the current expansion could last at least another 10 years, given the right circumstances. Somewhat perversely, the best reason for optimism is the depth of the scars of the global financial crisis. Savings rates are higher and leverage is lower than at any time since the mid-1990s. Americans are far less willing to increase 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 for working-age adults well below its 1990s level.
The experience of other countries is also encouraging. While the longest US expansion in history lasted only 10 years, many other wealthy countries have had much longer booms since 1960, including Australia, Austria, Belgium, Canada, Denmark, Finland, France, Greece, Iceland, Ireland, Japan, South Korea, Norway, Spain, Sweden and United Kingdom. According to the Organization for Economic Co-operation and Development, Australia has the longest sustained expansion on record, at 28 years. They haven’t had a real recession since 1991.
Curiously, this sustained expansion has not improved Australia’s standard of living relative to the rest of the world. Output per working-age adult rose as much in the Netherlands and Sweden as it did in Australia during its long boom. Finland and New Zealand did slightly better, and South Korea did phenomenally better, despite two massive financial crises. Australia missed the global financial crisis and the euro crisis, but living standards in Germany, Japan, South Korea, the Netherlands, New Zealand, Sweden and the United States has improved more since 2007. By this measure, even Portugal and Spain, which were battered by the euro crisis, are doing almost as well as Australia since 2007.
Avoiding recessions is good, but not enough.
Write to Matthew C. Klein at [email protected]