This has been the Rodney Dangerfield of economic recoveries. One would think that the current economic expansion would garner much respect. The recovery is now neatly into its 10th year, and is now the second longest on record. Absent the onset of what would be a very surprising recession by mid-year 2019, this will become the longest period of economic growth in America’s history. That’s impressive given how much the U.S. economy has achieved over the course of nearly a quarter-millennium.
Over the course of time, the expansion has produced nearly 20 million net new jobs, driven unemployment toward multi-decade lows, and produced an unprecedented level of available job openings. Additionally, it supported a stock market boom that has produced previously unknown levels of financial wealth, and which has supported a substantial rebound in both nonresidential and residential values. The expansion has also provided support for state and local governments to recover financially, which in turn has translated into significant growth in infrastructure spending even absent a federal stimulus package. Between August 2017 and August 2018, construction spending in many infrastructure categories grew robustly, water supply (plus 37 percent), conservation and development (plus 34 percent), transportation (plus 23 percent), and highway/street (plus 14 percent).
Despite all of this, for years, the current economic expansion was viewed as disappointing. People complained, and many still do that wage growth was too soft. Yet others complained about sub-par Gross Domestic Product and productivity growth.
But that has changed more recently. Consumer and business confidence have been surging. Tax cuts passed late last year seem to have unleashed some positive animal spirits, creating a level of enthusiasm for the economy that had not been observed during its early years.
While many fretted about tariffs and trade wars, thus far the damage has been minimal for most economic actors. Trade agreements have already been reached with Mexico, South Korea, and Canada. The U.S. and European Union remain engaged in trade negotiations, and there is every reason to believe that America’s European allies will eventually see fit to open their markets more fully to producers representing the world’s largest national economy. The wildcard, is of course, negotiations with the Chinese, who are associated with the world’s second-largest economy. However, several months ago, it appeared to be America versus the world. Now, it’s the U.S. versus China, with the implication being that the level of prospective disruption to trade will likely end up being far smaller than what was feared in early-2018.
Peak around the curtain, however, and there remain items to be concerned about. The national debt has crossed the $21 trillion mark. The federal fiscal year that began on October 1st will be associated with an annual budgetary shortfall exceeding a billion dollars, according to the nonpartisan Congressional Office. This is occurring at a time of relatively rapid national growth, which means that America has yet to constrain its habit of excess federal spending.
Then there is the matter of burgeoning inflationary pressures and rising interest rates. For now, asset prices, whether stock prices, home prices, or commercial real estate values, have managed to increase even in the context of rising costs and tighter Federal Reserve policy. In late-September, the Federal Reserve raised interest rates again, this time bumping the Fed Funds rate up to 2.25 percent from two percent. That marked the third time this year and the eighth time over the past three years that the Federal Reserve has tightened monetary policy in this manner. While raising rates, Fed officials expressed confidence in the near-term performance of the economy.
But all good things must come to an end, and if inflation becomes more apparent in the year ahead, financial markets are unlikely to perform nearly as well as they have been, especially if the Fed continues to tighten in response. A significant decline in asset prices likely represents the leading threat to the U.S. economy in 2019 and beyond. The next downturn is unlikely to be nearly as severe as the 2007–2009 episode, and may look far more like the 2001 recession, which lasted less than a year, but which also destroyed a considerable amount of financial wealth in the process.