DO ECONOMIC EXPANSIONS DIE OF OLD AGE?

This month marks the seventh anniversary of our current economic expansion, making it (at 84 months) the fourth longest uptrend among the thirty-three business cycles we have experienced since 1854.  All three of the longer expansions – 120 months, 106 months, and 92 months – have occurred since World War II according to the National Bureau of Economic Research (NBER).

 

But even our longest expansion is puny when compared with the records set by many other advanced economies.  “The Netherlands holds the record – its longest expansion, which ended in 2008, lasted nearly 26 years.  Australia may surpass that early next year.  Its continuing expansion dates back to 1991”. Canada, Japan, Britain, France, Sweden, Spain, and Italy have all had expansions in the post-war era that lasted 15 years or longer according to the economist magazine article quoted above.

 

Still, questions persist about the longevity of our (only seven years) up-trend, which is not even in the top ten among advanced country expansions.  In a 12/16/15 Federal Reserve (FED) news conference, FED Chairwoman Janet Yellen was asked:          “How confident are you that our economy won’t slip back into recession in the near future?”  Ms. Yellen responded:  “I think it’s a myth that expansions die of old age.  I do not think they die of old age.  So, the fact that this has been quite a long expansion doesn’t lead me to believe that its days are numbered.  I don’t see anything in the underlying strength of the economy that would lead me to be concerned about that outcome”.

 

Expansions do eventually end, just not from old age.  A 2/11/16 research paper from the Federal Reserve Bank of San Francisco sheds light on the primary causes of our past recessions.  They explain that:  “Few, if any, past recessions have been predicted by professional forecasters.  Forecasting recessions is difficult because each one tends to differ in important ways from previous episodes.  Past recessions have been triggered by upward spiking oil prices, by increases in FED interest rates designed to bring down high inflation, and by bursting asset price bubbles.  None of these scenarios would seem to fit the recent circumstances”.

 

Oil price spikes, rising inflation and asset price bubbles ended seven of our eleven post-war expansions2.  Two others were ended by reconversions from wartime back to peacetime production (after World War II and the Korean War).  The remaining two were mild, inventory adjustment type recessions relating primarily to the auto industry.  The first (1957-58) called the “Eisenhower Recession”, was caused by a sharp (some 30%) drop in auto sales in 1957.  The second (1960-61), referred to as a “rolling adjustment”, marked the beginning of the U.S. auto consumers’ shift to buying compact and other foreign made cars, and again left U.S. auto makers with excess inventories.

 

As the San Francisco Federal Reserve Bank research paper explained, “Forecasting recessions is difficult”.  We certainly won’t try it ourselves.  But, it does appear to us as laymen that many of the factors that led to our eleven post-war recessions are not currently present in our economy.  Until some of these factors – such as rising inflation, high interest rates or inflating asset bubbles – appear on the horizon, a recession would seem to be a low probability outcome.  And, it also seems improbable (though not impossible) that our current bull (rising) market which has tracked the economic expansion since it started back in 2009, would end while the expansion continued.

 

We haven’t had an economic expansion die of old age for at least the past seventy- years and maybe not ever.  We will simply rely on FED Chairwoman Janet Yellen’s comment that “It’s a myth that expansions die of old age”.  She is in charge of an organization (The FED) which employs over 300 people with PHD degrees in economics3.  And, we bet she knows an economic myth when she sees one.

Bill Boyd

Bill Boyd, CFA

 

FOOTNOTES:

  1. The Economist 5/21/16.

 

  1. The 7 recessions caused by oil price spikes, rising inflation and asset price bubbles were those occurring in: 1973-1975, 1980, and 1990-1991 (oil), 1969-1970 and 1981-1982 (inflation) and 2001 and 2007-2009 (asset bubbles). The Recession Prevention Handbook Eleven Case Studies, 1948-2007 By Norman Frumkin

 

  1. Federal Reserve Board information

 

 

The opinions voiced in this material are for general information only. Economic forecasts set forth may not develop as predicted and there can be no guarantee that strategies promoted will be successful.