Third-Longest U.S. Economic Expansion in History Showing Signs of Wear; Spells Bad News for Stocks
If it doesn’t feel like we’re enveloped in a U.S. economic expansion, you’re not alone. This has been the weakest post-WWII one to date, following a trend of diminishing business cycle returns. Much of Main Street has failed to reap the benefits of these purported “prosperous” times. Real incomes have sagged and inflation has outstripped wages. If economic quality of life hasn’t improved in this U.S. economic expansion, which has lasted for more than eight years, just wait until recession comes calling. It will make today’s times seem like nirvana to most.
As it stands, the current annualized growth rate is about 2.6% based on Q2 2017 figures. That’s an advanced estimate released by the Bureau of Economic Analysis (BEA), but it includes many variables like seasonality, and is frequently subject to revision. It also assumes the figures aren’t “politicized” to conform to an administration narrative, and that its models are accurate. In the end, it’s the BEA’s best guess of how much the economy grew—not hard “fact.”
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But taken at face value, the numbers still point to a troubling fact. That is, the economy has gone absolutely nowhere in more than eight years. Well, that’s not entirely true; the upper-middle class and above have done very well. Executives’ and highly skilled workers’ salaries increased handsomely. The class with discretionary capital to invest in asset markets have made out like bandits.
We can see this in high-end luxury brand stocks, many of which have soared to new highs. For instance, shares in LVMH Moet Hennessy Louis Vuitton SE (EPA:MC)—the world’s biggest luxury goods group—smashed through record highs back in April 2017. The reason? Record profits from their retail operation. LVMH reported a 15% year-on-year increase in first-quarter sales in its Q1 2017 earnings report, beating consensus estimates. Many other luxury brand retailers have achieved similar performance over the past several years. (Source: “LVMH shares hit record high after Q1 sales beat, other luxury stocks rise,” Reuters, April 11, 2017.)
But the middle class hasn’t been so lucky. This underclass—perhaps 80% of society—has not seen wages meaningfully increase, nor has it participated greatly in the stock market’s rise. On the lower end of the spectrum, it’s much worse. Throngs of people skirting poverty and retirees can barely keep up. Inflation erodes living standards like the slow boiling frog.
It’s these people that stand to lose the most once recession hits. The upper classes have the income and portfolios to buffer against price increases. The underclass, not so much. They mainly rely on the old-fashioned way of getting ahead—through hard work. But there’s only so much maneuvering one can do to maintain a lifestyle. Not everyone is cut out for a second job at Wal-Mart Stores Inc (NYSE:WMT).
U.S. Spending & Moderate Growth Rate Contributing to the Longest Economic Expansion in the History
This current U.S. economic recovery has staying power. Should it last until May 2018, it will be the second-longest on record. Should it last until the end of 2019, it’ll be the longest. Many observers are surprised the expansion has lasted so long, considering the depth of despair in which it came. But upon closer inspection, perhaps they shouldn’t be. Record-low interest rates are a powerful aphrodisiac.
Although low rates are contributing to steady consumption activity (thus fueling this long period of low growth activity) it doesn’t come without costs. The consumer credit monster is becoming a factor once again.
U.S. household debt has now topped the peak last seen during the U.S. housing crisis. Consumers piled on an additional $149.0 billion in Q1 2017, bringing total liabilities to $12.73 trillion. Instead of mortgage debt being the primary driver, student and auto debt is leading the way this time. The ratios of debt-to-income are lower than in 2008, but interest rates are half of what they were. In a normal rate environment (say four percent or so), those numbers look much different. (Source: “Household debt tops 2008 peak ahead of financial crisis,” USA Today, May 17, 2017.)
As we can see, Americans are using debt to subsidize the lifestyle their incomes can’t afford. And there’s nothing wrong with that when done within reason. But the fear is, the American consumer is taking on more than they can afford, comforted by the false paradigm of low rates. Perhaps they can remain this way forever. That would be the best-case scenario.
The very roots of this economic recovery start with debt. It started with a $2.0-trillion government bailout (Troubled Asset Relief Program—TARP), continued in the bond market with Operation Twist and Quantitative Easing, and continues with Central Bank purchases of assets. The Swiss National Bank owns $80.0 billion in stocks alone. Low interest rates are the straw that stirs the drink. Without them, the financing spigots dry up.
Thus, there are two ways this current U.S. economic expansion can end:
- Slowly, if interest rates stay suppressed for longer than anyone thinks possible.
- Rapidly, if interest rates march higher to a threshold that makes debt servicing difficult.
In scenario #1, the consumer keeps borrowing enough to drive tepid growth awhile longer. But despite low servicing costs, consumers eventually retrench, based on the sheer volume of debt. There are theoretical limits to how much consumers can borrow, assuming rates don’t go negative.
In scenario #2, interest rates rapidly rise, forcing consumers to default, triggering a recession. What could cause such a scenario? I would argue, the U.S. debt ceiling negotiations have that potential, or perhaps, the Federal Reserve exiting the bond market as part of their “Quantitative Tightening” program.
Time will tell how the current U.S. economic expansion wraps up. Quick and painful, or slow and foreboding. It won’t be pleasant either way.
U.S. Economic Expansion Timeline—How Today’s U.S. Economic Expansion History Stacks Up (Post 1960)
|
U.S. Expansion Chart: 6-year mark in each expansion |
Time until the onset of the next recession | |||||
|
Unemp. rate |
Jobs (percent change since start of expansion) |
Real GDP (percent change since start of expansion) |
Weekly Earnings (average percent change during last 12 months) |
|||
|
Jun 2009-continues |
June 2015 | 5.3% | 8.3% | 13.5% | 2.3% |
unknown |
|
Nov 2001-Dec 2007 |
Nov 2007 | 4.7% | 5.3% | 18.0% | 4.0% |
none |
|
Mar 1991-Mar 2001 |
March 1997 | 5.2% | 12.3% | 22.1% | 3.8% |
48 months |
|
Nov 1982-Jul 1990 |
Nov 1988 | 5.3% | 20.1% | 32.6% | 2.8% |
20 months |
|
Feb 1961-Dec 1969 |
Feb 1967 | 3.8% | 22.2% | 39.4% | 3.5% |
34 months |
(Source: Bureau of Labor Statistics, Bureau of Economic Analysis)
