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  • How Much Life Is Left in This Economy?

    By: Craig Fehr, CFA December 01, 2019

    When the current economic expansion began in 2009, nobody had ever taken an Uber or used an iPad. This streak of growth in the U.S. economy is the longest on record, but recent global and policy uncertainties have raised concerns about its longevity. We think the expansion can extend through 2020, but with age will come greater vulnerability to risks. Here are four key takeaways about the health of this economy.?

    1. Longer but not stronger – This expansion holds seniority but not necessarily superiority over its predecessors. Prior expansions have lasted an average of six years, and we could make a case for this one to live twice that long. Looking at prior long-lasting expansions:
      • The ’60s expansion holds the crown for the strongest, with the economy booming on the back of consumer spending (fueled by a dramatic rise in consumer credit), tax cuts and government spending (Vietnam, social programs, etc.).?
      • The ’90s expansion is second in terms of length and strength, driven by the internet boom and rising business investment. The bursting of the tech bubble brought an end to this economic run.?
      • The expansion through the early to mid-’00s grew with low rates and the booming housing market. This was also its undoing as the bursting of the housing bubble sparked a financial crisis that resulted in the steepest economic downturn since the Great Depression.?
      • Born from the Great Recession, the current expansion was a bit wobbly at first but has been sustained by a diet of supportive central bank policies and steady improvement in the labor market, with unemployment now the best in half a century.

      Source: Federal Reserve Economic Data, Edward Jones

    2. Its weakness has been its strength – A defining feature of this economic rebound has been its sluggishness. GDP growth has averaged 2.3% since it began, compared with a long-run average closer to 3% and average growth of 4.3% for the other three expansions that made it past their 7th birthday. In fact, while quarterly GDP growth did reach a current cycle high of 5.5% in the second quarter of 2014, this is the only expansion on record to not have a calendar year of GDP growth in excess of 3%. However, the strength of the economy often becomes its undoing, as overheating growth produces high inflation and/or asset bubbles, neither of which we believe are prevalent at the moment. For perspective, in the eight quarters leading up to the end of the expansion in the ’60s, GDP growth averaged 4.2%. The average was 4.9% in 1998-1999 and 3.3% in 1988-1989.*
    3. Aging less gracefully – In the last four quarters of the ’60s and ’90s expansions, there were two quarters of strong growth averaging 4.8% and two averaging just 1.2%,* signaling that growth can be increasingly variable and sensitive to risks later in the cycle. We don’t think a recession is imminent, but existing conditions have grown more balanced:
      • Positively, unemployment is historically low, providing a positive outlook for wage growth and consumer spending, which constitutes the lion’s share of GDP. In addition, corporate earnings are expected to rise again in the coming year, and interest rates are likely to remain supportively low for a while longer as the Federal Reserve has shifted to a more stimulative approach.
      • On the other hand, manufacturing activity has slowed markedly, trade tensions are holding back business investment, and political uncertainties (including the upcoming presidential election) all threaten consumer and business confidence and, thus, the pace of economic growth.
    4. The Fed, not Father Time – Historically, downturns are spawned from a popping bubble (tech, housing), an external shock (oil) or overly restrictive monetary policy, not their age. We don’t believe any of those conditions are looming at present, but we think an end to this cycle could come when inflation pressures eventually build to the point that the Fed has to raise interest rates.

      Bull markets rarely end without an accompanying recession. This is good news for investors, in our view, because we don’t think a recession is looming. Policy risks and sluggish global growth are likely to spur bouts of volatility, but this expansion is not on life support and should continue to offer support to the stock market in the coming year.

    Important Information:

    *Sources: Bloomberg, Edward Jones calculations.

    Past expansions are not a guarantee of what will happen in the future.

    More Resources:

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