This week the U. S. of A. celebrated two important milestones. It was the 241st year since we officially told Great Britain that “we got this” on July 4th. Before that though, we marked the 8th birthday of this economic expansion on July 1st! This expansion is now the third longest in history. Only the growth during the 1960s and 1990s was longer.
Can you believe it? In June of 2009, people were wondering if the ‘green shoots’ of growth that Ben Bernanke talked about were real. The air of uncertainty was everywhere with the number of jobs contracting. However, at that moment companies were about to stop layoffs and start thinking about hiring.
Today, the talk is of labor shortages, wage pressures, and possible tax cuts – all positives for economic growth.
When you get this old though, you begin to think about the end…of the expansion, that is.
There are a few indicators that disrupt economic expansions, and one of them is not ‘old age.’ Interest rates or oil prices being too high are two of the chief culprits of cutting off economic growth. Over investment is a third reason that eventually leads to economic problems, and it usually relates to a particular industry.
Today, interest rates are higher than a year ago on the front end of the curve, but falling on the longer end. Historically, interest rates are not at troubling levels yet but this is something to monitor moving forward. This is especially true since the Fed Chairwoman Janet Yellen’s term ends in January 2018. Oil prices are falling, so the savings at the pump acts like a tax cut and is a stimulant rather than a restriction to consumers.
A few industries have issues, such as energy with low oil prices and retail thanks to the disruption of e-commerce. Both suffered from over investment with the shale boom and to a lesser extent, retail shopping buildout (compared to Europe, the US has many multiples of less square footage). These do not seem to be a threat to the broader economy, however. This is unlike housing in the 2000s that touched so many parts of the financial system that it nearly toppled it.
Part of the reason growth only averaged 2% during this economic cycle compared to 3-4% historically is that households have been paying down debt. This is likely a factor keeping it from going too far off the rails as well. Balance sheets are stronger and on solid footing, which is ultimately a positive factor.
On the horizon, tax reform could provide a boost to this cycle. Still, secular trends such as lower population growth and technology disruption might put a cap on reaching the ‘good old days’ of higher growth.
We hope you enjoyed your 4th of July cookout, and don’t forget about America’s other birthday celebration this year.
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