One reason the U.S. may be experiencing longer economic expansions could be the power of the pause
KC Mathews //January 7, 2020//
One reason the U.S. may be experiencing longer economic expansions could be the power of the pause
KC Mathews //January 7, 2020//
There is a common consensus these days that we are due for a recession. It’s understandable why many may believe this: Over the past 40 years, the U.S. has experienced a recession approximately every 10 years (1980-82, 1990-91, 2001, 2008-09).
There are numerous factors that cause a recession and the duration of an economic expansion is relatively low on the list. For example, Australia has been in a 27-year expansion, primarily due to population growth – but that doesn’t necessarily mean they’re due for a recession.
Since 1945, the average duration of the 11 economic expansions in the U.S. has been 59 months, or just shy of five years. Economic cycles after 1945 (relative to cycles prior to 1945) have been more stable with fewer recessions due to more effective monetary policy.
In July 2019, we set the record for the longest expansion in U.S. history. If one bases their recession forecast solely on duration, they could argue that we are due for a recession. But we must be careful with averages.
The Great Recession ended in March 2009. According to the economic textbooks, it would be rational to expect a Great Recovery in the following years. That didn’t happen, however. Instead, the U.S. experienced the Great Moderation. The current economic expansion has delivered an average annual GDP growth of just 2.3% since 2009 versus the average growth during an economic expansion of 4.6% since 1945.
One reason the U.S. may be experiencing longer economic expansions could be the power of the pause.
Throughout the past 10 years, there appear to have been several small recessions – or pauses – in the economy. These pauses mitigate any economic imbalances or excess that often lead to a more traditional recession. As we look ahead, past pauses may offer clues into future economic performance.
After the 2008 to 2009 recession, economic activity did rebound in 2010, even if only to a paltry 2.5% growth rate. Then, there was a pause. In 2011, economic data pointed to a slowdown and GDP grew at just 1.6%. This was perhaps indicative of a mini-recession, which is when part of the economy goes into a recession, or significant slowdown, without pulling the entire economy into an official recession.
Additional key data points about this pause include:
The U.S. economy paused again in 2015 to 2016. Economic activity was robust in 2015, with GDP growth at 2.9%, but that wouldn’t last. In 2016, GDP paused again, slowing to a snail’s pace of 1.6%. Other factors associated with this pause include:
We are in the middle of this third pause. It is expected that economic growth in the U.S. will be 1.9% in 2020, indicating another pause. Other data points that signal a pause include:
There are numerous catalysts that can lead to a recession such as inflation, high interest rates and other imbalances in the economy. The pauses experienced in this expansion have curtailed these potential threats, allowing the U.S. economy to grow modestly and perhaps extend the current expansion cycle for several years.
KC Mathews, CFA, is the executive vice president and chief investment officer at UMB Bank.
Dan Trgovich, CFA, is an assistant vice president and equity research analyst at UMB Bank.