It notes the upcoming 10th anniversary of the
U.S. economic expansion that began in June 2009. This cycle will surpass
the 1991-2001 growth cycle to become the longest since 1854. However,
the point of the report is that while “this economic achievement is
impressive, few are in the mood to celebrate.” The risk of a downturn is
rising, it says, amplified by heightened trade tensions with China and
now Mexico. It cites IHS Markit’s U.S. Manufacturing Purchasing
Managers’ Index decline in May to its lowest level since September 2009.
The other reason people are blase about this
milestone, Bloomberg thinks, is that the expansion has been nothing to
brag about. It has “clumped along slowly,” never overheating, which is
part of the reason for its longevity — but previous cycles have been
“peppier” even when they were extended.
At its present pace, this run would have to last
six more years to match the aggregate growth of 1991-2001, and nine
more to replicate the go-go growth of 1961-69, when GDP expanded 54%,
according to calculations by Nir Kaissar, a Bloomberg Opinion columnist
who’s founder of asset manager Unison Advisors. “I characterize this as
the recovery of fits and starts,” says Michelle Meyer, head of U.S.
economics at Bank of America/Merrill Lynch & Co.
The hallmark of this cycle has been
underperformance, the report says. The Federal Reserve repeatedly
predicted it would need to raise interest rates to temper excessively
rapid growth — then repeatedly backed off because growth came in below
expectations and inflation languished below the Fed’s 2% target.
The central bank finally did start ratcheting up
rates in earnest at the end of 2016, by a total of 2 percentage points
over two years. But it put its tightening campaign on hold after its
December meeting, when plunging stocks, trade tensions, and a partial
government shutdown rekindled fears of a slump.
Growth is lukewarm despite stimulative fiscal
policy from Congress and the White House, Bloomberg thinks. The federal
budget deficit had shrunk to just over 2% of GDP at the end of 2015, but
it’s widened to almost 4.5% since thanks to the tax cut at the end of
2017 and more spending, particularly on defense.
The single best indicator of this expansion’s
weakness is the cost of money, as measured by the real interest rate.
The yield on 10-year Treasury Inflation-Protected Securities fell from
4% during the effervescent dot-com boom at the end of 1999 to below zero
in 2012 and 2013. It rebounded to just over 1% late last year but has
sagged back to 0.4%. When money is this cheap, it indicates weak demand
for credit or an overabundance of savings — or both.
To Harvard economist Lawrence Summers, the
expansion now has features of secular stagnation in which satisfactory
growth can be achieved only by extreme fiscal and monetary stimulus. He
believes this is now hitting much of the developed world, including
Japan and Europe.
In the U.S., the 2017 tax cuts were tilted
toward the rich, who don’t tend to spend windfalls and businesses, which
haven’t stepped up investment significantly. The National Association
for Business Economics said in January that in a poll of its members,
84% said their companies hadn’t boosted outlays or hiring in response to
the tax cuts.
A key feature of the current expansion is the
decline in unemployment, with only 3.1% of men age 25-54 officially
unemployed in April. However, an additional 10.8% were out of the labor
force entirely. “The United States is still a long way from full
employment,” says Dartmouth College economist David Blanchflower, author
of Not Working: Where Have All the Good Jobs Gone?
Expansions typically end when the central bank
raises interest rates excessively to stave off inflation — or, less
often, they’re cut short by a financial crisis, as in 2007-09, when
“irrational exuberance” led to a wave of defaults and liquidations.
Because of the tortoise-like pace of this
expansion, price pressures have been muted. Also, there’s little
evidence of the kinds of bubbles that ended the last two expansions.
Still, our pretty-good times can’t last forever,
Merrill Lynch’s Meyer says and notes “that seems to be the consensus
among bond investors, who’ve driven the yield on 10-year Treasuries down
to just 2.1%, the lowest in two years.” Stock investors, on the other
hand, are relatively optimistic.
In 1931, John Maynard Keynes wrote about “the
long, dragging conditions of semi-slump, or at least sub-normal
prosperity” following a recession. Optimistically, Keynes said
policymakers had the means to treat such a condition, but only if they
choose to exercise their power. Blanchflower, who cites Keynes, writes:
“That quote sends shivers down my spine every time I read it.”
So, we will see. There are numerous policy
threats to growth from many directions just now, especially in a period
that many think includes slowing of a long growth cycle — economic and
trade policy fights producers should watch especially closely as the
2020 elections near, Washington Insider believes.