Will age kill the longest economic expansion?

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Happy anniversary to the longest economic expansion in the United States. June marked 10 years of growth, corresponding to 1991-2001 as the longest expansion in US history. And the good news continues. Third quarter numbers will set new records.

But rather than partying, most experts prepare eulogies. This extension is too old, they worry. Wrong! Business cycles do not die of old age. The more people are afraid of this myth, the more I want to party.

Either way, what will end up killing this 120 month revival won’t be the fact that he’s more than twice as old as the average over 58 months for American expansions since World War II. To understand this, think globally.

Australia has completed its 27th year of uninterrupted growth in 2018. It’s still going strong. Britain grew from 1992 to 2008 – a streak of 16 years. This one, of course, was crushed by the 2008-09 financial crisis.

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So if age didn’t kill those longer stretches, why should it condemn America now?

People think of many phenomena the same way they think of biological life, where relative old age within any species ends up killing – technically called senescence. Senescence does not matter for savings. Expansions die from negative shocks of several billion dollars. Historically, central banks, like our Federal Reserve, were often the culprits. They often misread the tea leaves, dreaded an overheated inflationary reality, and squeezed more and more as the economy weakened. While I don’t think rate cuts are necessary now, the fact that central banks around the world are starting to cut shows that they don’t mind overheating now.

They shouldn’t either. This expansion has resulted in average quarterly GDP growth of around 2% per year. Lazy! The post-war average before 2009 was 3.3%, including recessions. Until last August, wage growth hit 3% year over year in just one month during this entire cycle. Fed data shows workers with only a high school diploma (or less) fared worse, with wages down by 4.2% in total from 2007 to 2013. They only returned to pre-recession levels in 2017. Almost every economic measure you look at – inflation, money supply and loan growth, industrial production, consumer spending – shows slow growth.

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The cause? The Federal Reserve and its long-term “quantitative easing” – buying bonds mistakenly called “stimulus”. Why? This bond purchase lowered long-term interest rates. Fed officials thought it would make borrowers impatient. But the banks have to provide these loans. Banks finance long-term loans by borrowing at short-term rates. Therefore, this spread between short and long-term rates – the famous “yield curve” spread – is an indicator of the profitability of new loans. The Fed’s cut in long rates when short rates were close to zero weighed on loan profitability. The banks therefore reluctantly lent. Businesses have struggled to obtain credit. The quantity of money did not increase, which kept inflation low and economic growth lagging behind. The Fed’s Quantitative Quaalude turned an economic “boom” into a slow, long and joyless march to growth.

This longest and slowest expansion has another payoff: it’s the most hated in history. All along, experts have dissected the growth. At first it was normal skepticism, with people fearing a wasted decade of depression, double dip, or Japanese style. These fears have never completely disappeared. Every irregular slowdown in growth (typical variations within any economic cycle) still gives rise to fear of a recession today. See current concerns about slowing manufacturing data. Experts say this old shaky economic recovery is dying before their eyes.

As I detailed recently, the fears of others are your friend. They keep the euphoria at bay and lower expectations. This makes the positive surprise easier to achieve, supporting stocks. It also explains why the longest bull market in history runs alongside this long, joyless expansion – long, slow twin ascents. The 16% annualized return on equities this time is lower than the historical average of 21% for bull markets.

Forget the fears of age that kill this expansion. As long as people hate this ever-growing US economy, stocks have room to climb.

Ken Fisher is Founder and Executive Chairman of Fisher Investments, author of 11 books, including four New York Times bestsellers, and No. 200 on the Forbes 400 Richest Americans list. Follow him on Twitter: @KennethLFisher

The views and opinions expressed in this column are those of the author and do not necessarily reflect those of USA TODAY.


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