Ten Years And Counting by Guest Blogger Robert C. Klemkosky, Professor Emeritus of Finance, IU Kelley School of Business

This July, the U.S. will set a record for the longest economic expansion in 100 years, assuming a recession doesn’t start, which is highly unlikely. Since WWII, there have been 11 economic expansions that have lasted an average of 58 months; the longest one previously was 120 months from 1991 to 2001 and the shortest 12 months from 1980-81. The current expansion is more than twice as long as the U.S. norm but it’s nowhere near a world record. China and Australia are in their 28^th year, and India and Taiwan both have experienced more than 20 years of economic expansion. Several European countries and South Korea and Japan have also experienced economic expansions of more than 10 years.

While this U.S. expansion has longevity, it has lacked rigor in terms of economic growth; the growth of gross domestic product (GDP), the final output of goods and services, has been an anemic 2.2% annually, the slowest of any economic expansion since WWII. The expansion has benefitted some sectors of the economy more than others: Jobs have been created for 104 consecutive months as more than 20 million jobs have been added to the workforce. This has probably been the most notable achievement of the current expansion. The unemployment rate of 3.6% is at a 50-year low, down from 10% in 2010, and the 7.45 million job openings are at the highest level relative to unemployment of 5.82 million since records began in 2000. At the end of 2009, there were 15.1 million unemployed and only 2.49 job openings. The manufacturing sector has added 1.1 million jobs since 2009. There is a worker shortage.

That’s the good news. But wage growth has been anemic; average hourly earnings averaged 2-2.5% for much of the expansion and only recently have been above 3% but still below the 50-year average of 4.1%. As a result, labor’s share of national income has fallen from 69.9% to 66.4%. Almost half the increase in jobs is due to those aged 65 and older, some because the new 65 is the old 55 but others based on need. The labor force participation rate at 82.1% for those aged 25-54 is below 2007 levels, providing some slack in the labor force.

While Main Street may not have prospered, the net worth of households has surged from $57.8 trillion to $108.6 trillion in the last decade. This has been due to appreciating stock and home prices, and bonds to a lesser extent; the median price of an existing home has increased from $182,000 in 2009 to $277,700 today, and the S&P 500 has risen 336% since March 2009. The yield on the 10-year Treasury bond fell from above 4% in June 2008 to 2.05% today; as yields fell, bond prices increased, creating wealth for bond holders. This wealth creation has not been distributed evenly throughout society as only 54% of households own stocks and 64.3% own homes. This has created record high wealth inequality in the country. Today, according to the World Inequality Database, the top 0.1% of U.S. households control 20% of U.S. wealth, the top 1% control 36% and the top 10% control 74%. This means the bottom 90% control 26% of the wealth, the bottom 50% have zero wealth and the bottom 30% have negative wealth. The middle class, the middle 40%, control 8% of the wealth. Wealth inequality will be a major political issue going forward.

There are several reasons for the wealth inequality. One, there is also income inequality, which fosters wealth inequality. And second, the Fed’s policy of near-zero interest rates and quantitative easing, the purchasing of more than $3.5 trillion of U.S. Treasury and mortgage-backed securities, has kept interest rates at historically low levels. This has supported high stock and bond prices as well as housing prices. The Fed has pursued this loose monetary policy because of the anemic economic growth and low inflation. The Fed set a 2% inflation target in 2012 because they were worried about deflationary pressures and lowered inflationary expectations. The Fed’s preferred inflation gauge, the personal-consumption expenditure price index, has been at or above 2% only eight months since then, and core inflation, excluding volatile food and energy prices, has exceeded 2% only two months. The U.S. has experienced moderate inflation for the last two decades and especially during the current economic expansion, which has helped real (inflation-adjusted) wages.

Debt was a major cause of the 2008-09 financial crisis especially in the household and financial sectors. One would think that a lesson would be learned from the financial crisis but debt is at an all-time high of 230% of GDP. Most of this increase in debt relative to GDP can be attributed to the federal government and corporate sectors. Government public debt has more than doubled from 34.8% of GDP in 2007 to 76.8% in fiscal year 2018. It used to be that the government was supposed to run fiscal surpluses during economic expansions but that hasn’t happened since fiscal years 1999-2001. 

The U.S. government fiscal deficit is heading toward a trillion dollars per fiscal year with no political will to reduce it. The Congressional Budget Office projects federal debt to be 145% of GDP by 2050, almost another doubling. As The Wall Street Journal recently headlined, “Washington Puts Aside Fears and Embraces Debt.” U.S. non-financial business debt rose to $15 trillion in 2018 from $9 trillion in 2007, taking advantage of historically low interest rates. They have made government and business debt manageable thus far, but a large upward spike will be painful. The financial sector has reduced its debt and leverage due to new laws and regulations. The household sector has more debt today but only 76.4% of GDP versus 98% in 2008. Mortgage debt, which was the problem during the 2001-07 economic expansion, is about the same, but student, auto, and credit card debt is much larger today. Households have had a personal savings rate of 7.01% during this expansion versus 4.68% during the last one from 2001-07. Historically low interest rates have forced higher savings rates to overcome what some refer to as financial repression for savers, encouraging more risk taking.

While the U.S. is celebrating 10 years of uninterrupted economic growth, many are in no mood to celebrate as the fruits of the expansion have not been equally distributed. This has led to populism, anti-globalism and losing faith in capitalism. A recent Gallup Poll showed only 45% of young adults had a favorable view of capitalism versus 51% for socialism. Among all adults, 56% have a favorable view of capitalism, the lowest since 2010.

An economic recession does not appear imminent so the U.S. will set a new record for the longevity of an economic expansion. The underperformance of economic growth for this expansion may be the primary reason for its longevity; there are no price pressures or imbalances and bubbles in the economy or financial markets. The question is whether 2% economic growth is the new norm or can be ramped up higher as in 2018. Many, like Harvard economist Lawrence Summers, believe the U.S. economy is in a period of secular stagnation with sustainable subpar growth. The Fed also believes the economic growth potential is around 2.0%, based on slow growth in the workforce plus subpar growth in productivity.

How and when will it end? It is difficult to determine whether this expansion is mid-cycle or late-cycle; the only certainty is what Yogi Berra may have said: “It’s later than it used to be.” Economic expansions don’t normally die of old age; it takes outside forces like the Fed raising interest rates and starting a run-of-the-mill cyclical recession, supply side shocks like oil in the 1970s or a financial crisis like that of 2007-09 to end an expansion. Many economists and CEOs believe the risks of a recession are growing. When a recession does occur, the public will not know about it officially for six or more months. The National Bureau of Economic Research has a Business Cycle Dating Committee that will decide when it starts. Many believe that two quarters of negative economic growth automatically qualifies as a recession, but there is no such rule of thumb in the U.S. The committee will look at many data points and metrics. Yogi Berra may also have said, “It's hard to predict, especially the future,” as economists don’t have a good record of forecasting recessions before they happen. If it happens, let’s hope the recession is short and mild. They are a normal part of capitalism.