Where are we from a business cycle perspective? Any closer to recession?
As it turns out, recessionary risks appear to remain contained. No doubt, this business cycle is long, and in fact, if this continues another year or so, it will be the longest in modern history, rivaled by the extended 1990's and 1960's cycles. Economists are quick to point out that there is nothing special about a long length that necessitates bad things happening from a business cycle 'time's up' perspective. Instead, it's about the magnitude of growth that has occurred during the growth cycle, as well as the excesses that can arise as cycles naturally expand. As we've noted several times, growth has been slow, for a number of reasons. Real GDP growth has been sub-par relative to prior decades mostly because of poorer demographics (fewer workers) and a lag in productivity (which tends to be a cyclical phenomenon). Despite hopes by the new administration of high growth into the 3's and 4's, it's been shown by a variety of economists that such growth isn't sustainable (or likely even possible) because of those long-term factors mentioned. Essentially, there would need to be a huge demographic boom (which obviously wouldn't become productive for several decades) as well as a major productivity increase (where it's difficult to locate where such a boost would originate). Labor force growth has averaged +1.5% for the bulk of the post-war period, but how we're lucky to get +0.5%. Productivity has grown in the range of 0.6% or so over the last five years. Obviously, the sum of the two factors is quite low. Interestingly, the areas where these factors are decent is abroad, and particularly in the emerging markets—both sales exposure from EM in developed markets as well as direct EM exposure, where valuations continue to look depressed.
Credit markets also look relatively healthy, despite more leverage being taken on by companies. Default rates have actually declined so far this year, to below average levels, which serves as a historical positive indicator. When defaults begin to rise in earnest, due to debt levels or slowing fundamentals, the end of the cycle may be much closer.
Back to the original question, it doesn't appear that recessionary risks are imminent. Mostly, this is due to the lack of excesses or even 'bubbles' that have characterized prior periods. This doesn't mean it can happen at some point, and there are, of course, any number of wildcards that could enter into the equation, such as an oil price shock or policy error, such as the FOMC raising rates by too much too soon or on the political side, via a trade or currency war. It appears the risks of either have fallen as of late.
Read our Weekly Review for May 8, 2017.
Read the previous Question of the Week for April 10, 2017.