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Longest US expansion on record
After the worst economic downturn since the Great Depression, the current US expansion will become the longest on record in July. The post-financial-crisis expansion began in June of 2009 and is now 120 months long, rivaling the March 1991-March 2001 business upturn. Many factors have contributed to this longevity
The trend of slower expansions
While the lackluster recovery after the Great Recession was unfortunate, though arguably the typical aftermath of a major financial crisis, it is important not to overstate the impact of the 2008-09 crisis on the slowness of the current expansion. In fact, a look at the postwar US expansions shows that, on average, they have become longer and slower. The average growth rate in US expansions has been falling quite noticeably—and more or less steadily—since the 1970s.
What is driving this downward trajectory?
- Earlier postwar recessions were dominated by the boom that followed World War II—which then faded.
- Larger and more mature economies tend to grow more slowly and more steadily, the global financial crisis excluded, than younger ones, where growth is faster and more volatile. This is not exclusive to the United States but can be seen in other developed economies such as in Europe and Japan.
- Aging populations have a moderating effect on the economy through slower trend growth and stable consumer spending patterns.
Disinflation and downward trend in interest rates have helped
Between the postwar period and 1990, US inflation and interest rates in the developed world rose and fell rather sharply. The overheating economy in the late 1960s, along with two oil shocks in the 1970s were contributing factors to the rapid inflation. Subsequently, the Fed took dramatic action in 1979 to put the inflation genie back in the bottle—and succeeded. Falling and more stable inflation made the task of the Fed and other central banks easier, in the sense that dramatic action to squeeze out inflation was not needed again. However, some have argued that ultra-low interest rates encouraged risk-taking in the 2000s, the inflation of housing bubbles—ultimately leading to the financial crisis.
With inflationary pressure still remarkably quiescent, the risk of the Fed having to raise interest rates by much—if at all—is low, meaning that as long as inflation and inflation expectations remain anchored, a monetary policy-induced recession is a long shot.
Post-crisis monetary and fiscal responses were also factors
One of the most remarkable aspects of the current expansion is the aggressive and unorthodox response of central banks to the financial meltdown in 2008-09. This response was especially forceful in the case of the Fed—much less so in the case of the European Central Bank and the Bank of Japan during the first few years post-crisis. This explains, in part, why the US expansion stayed on track (albeit slowly), while the eurozone and Japan suffered through further recessions in the 2010s. The removal of this monetary stimulus has been gradual enough to not seriously threaten the expansion.
The influence of fiscal policy is less clear, vis-à-vis the length of the expansion. The United States applied fiscal stimulus in 2009, but reversed course in 2011. In 2018, the US government put in place late-cycle tax cuts and spending increases. This has provided a temporary boost to growth in the near term. The momentum of the US expansion was strong enough that it would likely have continued without this stimulus. The weaker and choppier expansions in the eurozone and Japan can also be blamed, in part, on fiscal tightness—austerity programs in the case of the eurozone and a sales tax hike in the case of Japan.
So what's next?
The slowing growth of the US economy does not imply that recession is imminent. Barring a significant tightening of monetary policy (which is becoming increasingly less likely) or a negative shock of some other kind (a spike in oil prices, a large global downturn, a full-blown trade war, bursting asset bubbles, etc.), the US expansion could go on for a while longer. Nevertheless, slowing growth means that the vulnerability of the US economy to these types of shocks is rising.
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