Can economic cycles die of age?
Gautam Khanna, senior portfolio manager of Insight Investment’s Fixed Income Group, both asked and answered that question during a recent press luncheon in New York.
“When you look at the length of the cycle, this is the second longest cycle in history that we’ve had in the U.S. We’re going on 111 months. The longest cycle was 120 months,” Khanna said. “So the question is: Do cycles die of age? And perhaps the answer to that is ‘no.’”
The current cycle just surpassed the 1961-1970 expansion, which was 106 months. The longest cycle, which was 120 months, was the 1991-2001 expansion.
Insight Investment, part of BNY Mellon, is a specialist global asset manager managing assets across liability-driven investment, fixed income, multi-asset and absolute return strategies, and cash management solutions.
Insight manages client assets totaling over $794.1 billion with a growing global presence in the U.K., Europe, North America, Japan and Australia. It has had a significant presence in North America since 1991, and the firm currently manages $37.6 billion in assets for U.S. and Canadian clients.
Something Khanna said he finds quite interesting about this cycle is the growth in real GDP since the recession.
According to Khanna, “this particular cycle is still middle of the pack in terms of the amount of cumulative real growth that we’ve had in GDP.”
In fact, a 2016 Congressional Research Service report finds that the current economic recovery is the slowest recovery seen since World War II. According to the report, real GDP has grown at an average pace of 2% per year during the current recovery, compared with an average rate of 4.3% during the previous 10 expansions.
Additionally, more recent FactSet data shows that real GDP growth in the current expansion lags the other three expansions “by a lot.” As of the first quarter of 2018, real GDP has expanded by 21% since the beginning of the current expansion; this is far lower than the 36% compound growth FactSet saw at this point in the 1991-2001 expansion. The FactSet data also shows that the growth path for the longest expansions has continued to shift lower over time; the 1961-1969 expansion saw real GDP grow by 52% by the end of its ninth year, while the economy had grown by just 38% by the end of year eight of the 1982-1990 expansion.
Khanna suggests that the reason for the slow growth in this expansion is perhaps “because of the deep scaring we had coming out of the financial crisis.”
“For the first several years, post the great recession, we were referring to this recovery as a checkmark-shaped recovery, kind of like a little Nike swoosh,” Khanna said during the press luncheon. “Because it is a very shallow recovery, and it perhaps kept a lot of the animal spirits at bay.”
Khanna also speculated that a “fairly deep correction” midcycle in the credit market and commodity and energy space perhaps reset the clock a bit.
Looking forward, though, Khanna is confident that a downturn is not imminent, although there may be signs it’s getting closer.
“When small-business owner optimism is peaking, it’s usually a three-year lead time before you hit a recession,” he said. “Right now, that index is perhaps peaking. I’m not suggesting that we’re three years out; it could certainly be less than that. But certainly it gives us a little bit of confidence that a downturn is not imminent.”
The NFIB Research Foundation has collected Small Business Economic Trends data with quarterly surveys since the fourth quarter of 1973 and monthly surveys since 1986.
According to the September 2018 report, the NFIB Small Business Optimism Index continued its historic 23-month positive trend, with a reading of 107.9 in September, the third highest reading in the survey’s 45-year history.
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