This is the first of two back-to-back posts on US business cycle expansions and contractions. That the current expansion, which began in June 2009, is now, at 108 months—one year shy of besting the record from March 1991 to March 2001—makes good copy, if nothing else. For those who are statistically inclined, the National Bureau of Economic Research is overflowing with data. The NBER is still somewhat subjective, though, in the parameters it uses in defining the business cycle. For example, rather than stipulating dogmatically that a recession requires two consecutive quarters of decline in real GDP, it specifies that a recession is a “significant decline in economic activity spread across the economy, lasting more than a few months, normally visible in real GDP, real income, employment, industrial production, and wholesale-retail sales.” This subjectivity rises to the fore in the next post.
For the moment, we will attempt to sketch thumbnail comparisons among the five longest expansions since the beginning of the 20th century with the one the matters most to us, the current expansion.
June 1938 – February 1945
Mid-Depression to the End of World War II
Were it not for the interruption of “Roosevelt’s” recession of May 1937 to June 1938, the longest expansion ever would’ve dated back to the trough of the Great Depression in March 1933. Instead, when Roosevelt attempted to balance the budget and cut government spending in 1937 unemployment jumped from 14.3% to 19%; manufacturing output fell 37% to 1934 levels. The lingering fragility of business and consumer confidence four years after the trough of the Great Depression was on full display.
After seeing the response to his actions, in April 1938 Roosevelt implored Congress to apply $3.75 billion in fiscal stimulus and the expansion resumed. Adjusting for inflation, the Tax Cuts and Jobs Act of 2017 would have to be scaled back from $1.5 trillion to $660 billion to match Roosevelt’s stimulus. Clearly, a dollar of debt does not buy the economic productivity it used to.
While there is disagreement about the economic efficacy of Roosevelt’s social welfare programs, few doubt that America’s response to World War II was the most extraordinary mobilization of an idle economy in the history of the world. The mild recession that followed it lasted only eight months, as the economy shifted from wartime to peacetime production and consumption.
February 1961 – December 1969
Social Upheaval … And Economic Progress
The Vietnam War and the Civil Rights Movement made for a chaotic social backdrop to this expansion. Economically, though, the era saw a proliferation of innovations in electronics—the audiocassette, to the CD, to the first RAM chip, the barcode scanner. Real GDP grew at a 5.1% annual rate. At the same time, wartime debt continued to be paid down, shrinking to 35% of GDP by 1969 from 120% in 1945. By the end of the period, however, inflation was on the rise, ramping up from 1% in 1961 to 6% by 1969. An 11-month contraction followed after the Fed hiked the discount rate from 0.68% in June 1958 to 3.99% in November 1959.
November 1982 – July 1990
The Greatest Bull Market: Phase I
After runaway inflation was contained by the twin recessions of the early 80s, GDP grew by 4.5% during the Reagan presidency. As interest rates fell, the appetite for debt increased. The federal debt to GDP ratio rose from 35% to 52% and household debt followed suit, advancing from 44% to 60%. After barely an economic hiccup following the Crash of 1987, a relieved Fed hiked the funds rate from 6.58% in February 1988 to 9.81% in May 1989. A mild eight-month recession followed in July 1990.
March 1991 – March 2001
The Greatest Bull Market: Phase II
The longest expansion to date, 120 months, was in reality the second half of the grand supercycle that originated in 1982. GDP grew by a lesser rate of 3.6%, even as the tech innovation boom reached full flower. Disruptive innovation is initially a depressant on both GDP growth and employment. Debt to GDP moderated, sloping down to 57.5% from 62% and the CPI faded from 5% to 2%. The Fed funds rate bottomed out at 2.92% in December 1992 as a result of the easing during the preceding eight-month 1990 recession. It reached 6.5% by August 2000 near the peak of the dot.com bubble as the Fed put the brakes on. Another eight-month recession followed. True to form, a worried Fed drove the Fed funds rate down to 1% by March 2004.
November 2001 – December 2007
The Housing and Creative Finance Mania
As you may have noted, in each major expansion since World War II, the GDP growth rate declined from that of the prior one (5.1%, ’61-69; 4.5%, ’82-90; 3.6%, ’91-’01). It registered just 2.7% during this period, half the rate from 1961 to 1969. The ratio of Federal debt to GDP expanded from 55% to 63% and the CPI averaged about 2%. Aided by cheap and easy money, the housing bubble and the creative but ultimately doomed innovations in finance were the expansion’s Achilles’ heel. Blind to the solvency crisis on the horizon, the reactionary Fed ratcheted up the Fed funds rate from 1% in March 2004 to 5.25% by September 2006. The recession resulting from the financial crisis lasted 18 months—the longest since the aggregation of the twin recessions in the early 1980s.
June 2009 – May 2018
A Fragile Expansion & Asset Bubbles Addicted to Easy Money
The expansions above have been characterized by slowing growth in GDP, generally rising debt to GDP ratios, and ever lower rates of inflation. In the understatement of this post, the current 108-month expansion is unprecedented. The trends we have identified have continued unabated, reaching levels unseen before in history. Unlike its predecessors, in this expansion the secular headwinds to organic growth have coalesced.
According to economic historian Robert Gordon’s 12-minute TED talk, demographic, educational, debt and inequality factors have overwhelmed productivity-enhancing innovations. Federal debt to GDP surged from 80.5% to 103.7%, before accounting for the Tax Cuts and Jobs Act of 2017, but growth has continued to be anemic. Despite the Fed funds rate reaching essentially zero mid-recession and staying there until December 2015, in addition to the multiple QE’s that monetized debt though the purchase of Treasury and mortgage-backed securities, exploding the Fed’s balance sheet, GDP grew at an abysmal 1.9%. While asset prices ballooned in the wake of cheap money, the CPI was stubbornly resistant to Fed policy, averaging 1.5%.
Today, we have an odd cocktail of pro-cyclical fiscal policy, tightening monetary policy, and a cyclically tight labor market. Could a recession be just around the corner? A rising Fed funds rate has always accompanied one in the episodes above. Fresh off the press, real GDP softened to a 2.3% annual rate in the first quarter. Consumer spending on big-ticket durables slumped; expenditures for non-durables and residential construction were flat. Non-defense capital goods orders have been largely unresponsive to the generous incentives served up by the new tax law. These indications of slowing are in the context of the weakest expansion in our history.
Prone as most pundits are to extrapolate the present in perpetuity, precious little ink has been spilled on the subject of what might be on the other side of this most atypical, artificially inseminated expansion. As we have written before, the pernicious feedback loop of reckless behavior leading to broad spread excesses by both the public and private sectors has its parallels in the 1920s.
It took 43 months from August 1929 to March 1933 for the economy and markets to overcompensate for the excesses of the 1920s. It took another decade for animal spirits and spontaneous optimism to creep back into the public’s consciousness.
Ralph Waldo Emerson’s “Law of Compensation” may well apply today. “Within every cause grows the seed of its own effect.” The effect of this cycle’s fiscal and monetary policies and the extraordinary heights to which assets valuations have risen may well be proportionately painful.