(Bloomberg View) -- In a Bank of America Merrill Lynch fund manager survey in February, 70 percent of respondents said they believe the global economy is “late-cycle.” Who can blame them? The U.S. expansion is approaching its ninth birthday. That’s pretty long. But the age of an economic cycle has little to do with whether an economy is late. Indeed, in many ways, this expansion still has room to run.
Entering its 105th month, the current expansion has already lasted longer than those in the 1980s and 2000s. Yet a recent report from the San Francisco Federal Reserve concluded, “Empirical evidence indicates that expansions during the past 70 years do not become progressively more fragile with age.” Indeed, as the figure below shows, there is nothing about the length of an expansion that indicates whether it is about to end. If there was something special about a specific length of time, we’d expect to see the expansions cluster around that particular time length. There have been long and short expansions in the postwar era.
Historically, expansions end when excess in financial markets coincides with excesses in the economy. At the moment, cyclical sectors of the economy continue to operate below normal. Specifically, private fixed investment and household spending on durable goods -- autos, appliances, furniture -- remain well below their long-run average. In the 1990s, it was nonresidential business fixed investment that ran well in excess of normal. In the 2000s, it was the housing market or formally, residential investment. Today, these cyclical sectors account for an unusually low share of the economy.
In one respect, the low share implies that companies and households have been unusually cautious during the expansion. Economies contract in part through an element of surprise. A company expects strong growth and instead gets none, prompting a leaning out of inventories, employment and capital spending. Today, most companies and consumers are positioned for modest growth, and that implies there still is a ways to go. This raises the question: If the economy were to fall into a recession, what would actually go down? After all, cyclical sectors of the economy remain low relative to historical norms.
Some have pointed to the labor market as a sign that economic conditions are getting late. After all, the unemployment rate is at a level that is historically consistent with resource constraints that eventually lead to excess price pressures and recession. However, in other respects, the labor market is not behaving as if the cycle were late. For example:
- Temporary-help employment growth has been accelerating in recent quarters. This is unusual because employment across temporary-help agencies has long been considered a leading indicator for overall employment.
- Usually, employment growth moderates as the labor market matures. Today, jobs growth has averaged slightly more than 200,000 over the last six months, which is about as strong as it has been during this cycle.
- Employment across cyclically sensitive goods-producing industries tends to slow as the economy enters a late-cycle environment. The opposite is true today. Goods-producing sectors -- manufacturing, mining and construction -- are seeing a faster pace of jobs growth than service-providing industries.
So, there is support for the idea that there is some room for the momentum in the labor market to continue its strong performance despite unemployment being low.
Also, while resource constraints may be a topic for debate in the U.S., the notion that major economies in the rest of the world are “late-cycle” seems less compelling. In the euro area, as an example, the unemployment rate remains more than a full percentage point higher than its low point in early 2008. In some of the peripheral nations in the euro area -- Spain and Italy, for example -- the spread to the prior cyclical lows is even wider.
Sure, the current business cycle is getting old when measured in years, but in the areas that matter, it remains forever young.
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
Neil Dutta is the head of economics at Renaissance Macro Research, responsible for analyzing global trends and cross-market investment themes.
To contact the editor responsible for this story: Max Berley at mberley@bloomberg.net.
For more columns from Bloomberg View, visit http://www.bloomberg.com/view.
©2018 Bloomberg L.P.