Don't Underestimate U.S. Expansion: It's Headed to a Record
Recession is likely in the latter half of the Trump presidency, survey shows.
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(Bloomberg) -- This U.S. expansion may be moving like a tortoise, but it’s on its way to win the race.
Widely disdained for its relatively weak growth and pay gains, the expansion is about to complete its eighth year -- and it’s headed to become the longest on record, according to a Bloomberg survey of economists. Respondents put a 60 percent probability, based on the median estimate, on the growth streak running through at least July 2019 and thereby reaching 121 months, topping the 10 years of gains during the 1990s.
They’re betting on it even as the Federal Reserve raises interest rates and President Donald Trump’s fiscal policy-induced bump increasingly seems more hope than reality. As the economy made up lost ground after the financial crisis, the lack of big spurts or excesses resulted in an expansion that’s more slow and steady, which makes it well-placed to be extended.
“The U.S. economy looks pretty healthy right now when you think in terms of sectors that could blow up,” said Stephen Stanley, chief economist at New York-based Amherst Pierpont Securities LLC. Having avoided any “violent bounceback” during the recovery, “most sectors seem to have room to run,” signaling continued moderate growth, he said.
A strong job market, subdued inflation, low borrowing costs and healthier finances will be a tailwind for consumer spending while business investment, a laggard so far, is expected to join the drivers of growth. Even trade may become less of a drag.
Beyond 2019, though, the outlook dims. The probability of the expansion lasting through at least January 2021 -- the last month of Trump’s four-year term -- drops to 30 percent, according to the Bloomberg survey of economists conducted in early June. The possibility of a recession rises even more after that, with analysts seeing a 10 percent chance of the expansion enduring through January 2025.
Current demand is getting help from the labor market. About 15 million jobs were added since the recession ended in June 2009, and unemployment is at a 16-year low. Payroll gains have probably peaked, though they’re exceeding what’s needed to keep the jobless rate steady as people enter the workforce. A sustained acceleration in wages is still missing even with the U.S. near maximum sustainable employment.
Household spending, which accounts for about 70 percent of the economy, remains the sturdiest pillar of support amid record record wealth, improved savings, and less dependence on borrowing based on home-equity gains or risky credit lines.
Still, automobile sales, a standout in recent years, are shifting into slower gear. Vehicle discounts are up as dealerships try to clear their lots, and car makers are tweaking production plans.
Housing, another big-ticket item, has plenty of runway ahead. Rather than “explode back to normal” as is typical of the early stage of a recovery, it’s had a gradual climb, Stanley said. Home sales are being limited by low inventories even as prices are rising, so builders can ramp up as more first-time buyers enter the market and renters become homeowners. For now, shortages of skilled workers and available lots are weighing on residential starts, which fell May.
Companies are also becoming inclined to revive investment in equipment amid regulatory changes and a more business-friendly environment, and recent surveys show manufacturing orders are climbing.
“There is little or no evidence that traditional cyclical sectors -- namely housing, capex, and consumer durables more broadly -- are overextended, and sectoral balance sheets are reasonably solid,” Deutsche Bank analysts led by Chief Economist Peter Hooper wrote in a note this week. “For the year ahead, the risk of an economy that begins to move towards overheating seems noticeably greater than that of an economic downturn.”
Hooper’s baseline outlook includes no recession through 2019. A separate question in the Bloomberg survey found that the probability of a recession in the next 12 months was only around 20 percent.
Low inflation remains a challenge for the Federal Reserve. The central bank’s preferred measure exceeded the Fed’s 2 percent goal only once since 2012, and may not sustain gains above that level until late 2018, economists predict. That would be good for households, though businesses would welcome a return of pricing power.
The Fed continues to “expect the economy will expand at a moderate pace for the next few years,” Chair Janet Yellen said on Wednesday after the central bank raised its benchmark interest rate by a quarter point. “We want to keep the expansion on a sustainable path,” and try to “avoid the risk” of needing to hike so rapidly that it risks a recession.
Other hurdles have contributed to a downshift in the economy’s potential or long-run cruising speed. Companies chose to hire rather than invest in equipment, which, together with factors including measurement problems, helps explain why productivity is barely budging. Also, an aging population is depressing the labor-force participation rate, which is unlikely to get much help from foreign workers given the Trump administration’s stance on immigration.
While the expansion has been normal, “output has been held back by woeful productivity growth and an unusual decline in labor-force participation,” said Robert Hall, a Stanford University professor and head of the National Bureau of Economic Research committee that determines when recessions begin and end. However, there are “no signs that this configuration will end soon.”
Amherst Pierpont’s Stanley cautions that “economists are notoriously bad at forecasting turning points.” The risks this time also include a possible failure to spot financial-asset bubbles amid the Fed’s low-rate environment, and “there’s no shortage of geopolitical trouble spots,” he said.
Still, the expansion may wind up becoming the longest ever, and a Trump fiscal boost, if it does materialize, could “give it a second wind.”
--With assistance from Catarina Saraiva
To contact the reporters on this story: Shobhana Chandra in Washington at schandra1@bloomberg.net, Steve Matthews in Atlanta at smatthews@bloomberg.net.
To contact the editors responsible for this story: Scott Lanman at slanman@bloomberg.net, Vince Golle