What's Fueling the Longest Economic Expansion in U.S. History?

We’re now living in the longest U.S. economic expansion on record, and it all started in June 2009. Back then, Instagram hadn’t yet launched. Most cell phones still had buttons. Blockbuster was competing with Netflix – well, attempting to at least. Airbnb headquarters were in co-founder Brian Chesky’s house. Uber (then called UberCab) completed its first official ride in San Francisco that year.

We’ve come a long way in just over a decade, and all the while the economy has continued growing. But what made this current growth so durable that it set a record? Brent Schutte, chief investment strategist at Northwestern Mutual, says several factors combined to lift markets from the depths of the financial crisis to lofty new heights a decade later.

BEHIND THIS ENDURING EXPANSION

Proactive policy. An ounce of prevention works for your health and it appears policymakers in Congress and the Federal Reserve believe it works for sustaining economic growth, as well. From the Great Recession to today, policymakers have pulled out everything in their toolkits to kickstart a recovery and sustain long-term growth. Today, consumers and businesses are operating in an economy that’s more micro-managed than, perhaps, ever before.

A fundamental shift occurred in the darkest days of the crisis back in 2007 when the Fed stepped in and loaded its balance sheet with bonds to inject money into the economy and dropped interest rates to zero to encourage consumers and businesses to borrow. Congress, at the same time, approved a stimulus package that helped financial firms and the auto industry claw their way out of a hole. As experience now shows, their efforts worked. But as the economy strengthened, the Fed started raising interest rates again in 2015 to scale back its stimulus and “normalize” policy.

The Fed, just last year, was still talking about additional rate hikes to keep the economy from overheating, but recent trade confrontations – and their negative impact on markets – may have dissuaded the Fed from pursuing additional hikes. In fact, the Fed is now signaling rate cuts to provide a little stimulus to keep markets on an upward trajectory. In other words, the market may be driving policy today, and not the other way around.

“We continue to believe the underlying ‘do more monetarily and fiscally environment’ points to this cycle ending only after a brush with inflationary pressures,” says Schutte.

Even though this expansion is over a decade old, we think policymakers will likely continue listening to the markets when it comes to formulating monetary and fiscal policy. Think about it: Does any policymaker want to be responsible for ending the longest expansion in U.S. history? Probably not.

Scars of the Great Recession. Once-in-a-generation financial calamities tend to leave a mark on the generation that experiences them. The average American’s lifetime income potential dropped, on average, between $50,000 to $120,000 due to the collapse, according to the Federal Reserve Bank of Dallas. No surprise, consumers and businesses grew more cautious about their finances after the Great Recession. Today, consumer debt is in a more manageable position than before the crash and wages are rising modestly, further enhancing household balance sheets. Corporations don’t appear to have the same appetite for taking big (some might argue reckless) financial risks that proved ruinous a decade ago. The big banks at the center of the financial crisis, for example, are in far better condition, due to rigorous capital requirements. All said, this “age of moderation” may be aiding the expansion’s endurance. 

“Right now, excesses appear minimal and the Fed, whose rate hikes have historically served to help push ‘excess-ridden’ economies over the edge, has no desire to tighten the U.S. into a recession,” says Schutte.

Automation and tech. Finally, companies are eking out productivity gains through automation, robotics and general technological advances. Ten years ago, a handful of 3D printer models were becoming affordable enough to be practical in day-to-day operations. Today, that technology has seen wide-scale adoption in industry, allowing producers to churn out custom parts or tools rapidly and with minimal labor. Global annual sales of robots increased sevenfold as compared to 2009. Corporations big and small are migrating their tech infrastructure to the cloud, reducing the need for onsite datacenters and the accompanying engineering and maintenance. Artificial intelligence has yielded a host of productivity-boosting advancements, such as chatbots, automated data insights, object recognition, automated loan approvals and self-driving vehicles to name a few.

Consumers are also on the winning side of tech. Ten years ago, people still needed to leave their houses to do stuff. Today, leaving home is optional. Consumers can open a bank account, land a freelance gig, grocery shop, apply and gain approval for a mortgage, see a doctor and so much more from their couches via a smartphone.

These advancements have made the average worker more productive. It’s made it easier for companies to reach their customers and accelerate sales. It’s made products cheaper to make. Taken together, technology has helped keep a lid on the rising cost of goods and services, which has, in part, prevented the Fed from intervening to nip runaway inflation in the bud.

So, can the economy keep it up?

ROOM TO RUN

Schutte says three events typically occur before a recession. First, the economy needs to run out of slack, which, at the extreme, would mean every person that can be employed is employed and not a single machine is sitting idle. When there’s no slack, companies are producing at peak capacity.

Once the economy runs out of slack, it triggers the next condition: inflation. When employees are scarce (all the best have been hired), companies need to pay more to attract and retain workers. They need to invest in machines and enhanced capabilities to boost productivity. Those additional costs can trickle down to the consumer who pays for all those products and services. Finally, once inflation perks up, the Federal Reserve steps in and raises interest rates to moderate rising prices.

Although economic expansions throughout history seem very different from one generation to the next, they all tend to adhere to this life cycle. What differs is how long it takes to trigger those three key economic conditions, and Schutte believes the current expansion still has room because those conditions haven’t started cascading.

Consumer confidence is high. Inflation is low. Employment figures are solid. Wages are rising. GDP growth is steady. There are a myriad ways to measure the economy, and by most measures the economy remains strong. Even if inflation ticks up, Schutte believes the Fed will walk the economy with a long leash; they’d rather see modest inflation than overstep and raise rates too rapidly.

“The Fed gets to put the final nail in the coffin of every economic cycle by raising rates,” Schutte says. “They’re not going to get chastised as much if they let inflation run hot versus if they tighten too quickly and have the economy fall apart.”  

THE LONG RUN

When assessing where we stand in an economic expansion, market pundits love using baseball analogies. They might say we’re in the early innings. Maybe we’re somewhere in the 7^th. 

Now that we’re living in the longest period of economic growth in U.S. history, you’re probably going to hear people talking about whether we’ve, in fact, reached the 9^th, and final, inning of this thing.

But this line of thinking neglects the fact that baseball games don’t have a clear endpoint. Sure, most games end in nine innings, but the MLB record is a 26-inning marathon between the Brooklyn Robins and the Boston Braves set back in 1920. The game ended due to darkness (it could have gone longer), but not when some imaginary play clock struck zero.  

“As we have been saying for some time, we don’t believe the mere passage of time is a useful indicator of a looming recession,” says Schutte.

The Australian economy, for example, has dodged an official recession for nearly 28 years – the longest stretch of economic growth in modern history (it’s still going). How long have Australians been playing the “9^th inning” down under? 

Regardless of what the next few years have in store, investments are just one piece of a larger financial plan that incorporates insurance, paying debt, saving for college and more. Whatever the market does next year, or next decade, having a plan in place will help you reach your lifetime financial goals when the market is hot and when it’s cold.

 

 

Commentary is written to give you an overview of recent market and economic conditions, but it is only our opinion at a point in time and shouldn’t be used as a source to make investment decisions or to try to predict future market performance. There are a number of risks with investing in the market: if you want to learn more about them and other investment related terminology, click here.