Length Of Economic Expansions

Summary

• As we hit mid-year 2018, the current economic expansion that began in June 2009 turns 9 years old.
• The current cycle is now the second longest in U.S. history.
• This article gives a historical examination of economic expansions to help readers frame their own view of the length of this current business cycle.

Given the severity of stock market corrections that can occur at the end of the business cycle, it is natural for investors to probe where we are in the current economic expansion. Mark Twain once said: "History doesn't repeat itself, but it often rhymes." Analyzing past business cycles can help us understand the uniqueness of this elongated expansion.

The graph below shows the lengths of the 14 periods of economic expansion since the Great Depression. At the left, I have listed the event that predated the expansion. For example, the National Bureau of Economic Research dated the trough of the Great Recession as June 2009, and the economy has not re-entered recession, marked as a decline in economic activity lasting more than two quarters, in 108 months and counting.

The current expansion of 108 months is now the second longest in the sample period. While I show only the post-Depression expansions in this article, this is also the second longest expansion in data from the National Bureau of Economic Research dating back to the 1850s, a time span pre-dating the Civil War.

The current expansion still trails the 1990s bull market by 12 months, a streak that would be reached one year from now in July 2019. The average length of expansion of the previous 13 episodes is just 59 months. A look at the two other expansions of similar length may be instructive to Seeking Alpha readers.

1960s Expansion

By the end of a lengthy expansion into the late 1960s, inflation was ebbing higher as a result of increased federal deficits. A relatively mild recession began in late 1969, driven by fiscal tightening aimed at attempting to close the budget deficits driven by the Vietnam War. Through the mid-1960s, NASA had been receiving more than 4% of the federal budget as part of the great space race that culminated with the moon landing at the end of the decade. Monetary tightening to head off rising inflation also likely contributed to the mild recession. After a recession of less than one year in duration, the economy would expand for another three years until the exogenous shock of the 1973 oil crisis and more substantive stagflationary economic correction.

1990s Expansion

The 1980s were characterized by a lengthy peacetime expansion, but the rise in debt accumulation from defense spending outlays, a hawkish Federal Reserve, and an oil price shock driven by the Iraqi invasion of Kuwait brought the expansion to an end. After a relatively modest contraction over eight months in 1990-1991, the U.S. experienced its longest period of growth in American history. The collapse of the tech bubble that built in the late 1990s and the terrorist attacks of September 11, 2001, ultimately brought the expansion to its end.

How Long is Too Long?

The Great Recession created a peak-to-trough reduction in activity multiples larger than the early 1990s and early 2000s recessions. Unemployment peaked at 10%, a figure several points higher than previous downturns. The economic recovery has been uniquely slow as the financial system needed time to nurse its wounded balance sheet, constraining lending. It stands to reason that a slow recovery from a deeper contraction could involve a longer recovery horizon.

The last four economic expansions are among the six longest of the post-Depression era. This may suggest that the maturation of monetary policy could be increasingly impactful in balancing inflation and unemployment. A counterargument would be that this most recent correction was only stopped by extraordinary monetary accommodation in the form of Federal Reserve asset purchases and direct capital injections into key lending institutions, and that the use of monetary policy as a moderator of the business cycle has peaked.

Demographic impacts like the economy's aging population may also be subduing inflation. Several economic expansions have been curtailed by overzealous Federal Reserve tightening. To this point, that behavior has been unnecessary given subdued inflationary forces. Fed rate hikes while inflation remains below target could be presaging an end to the business cycle as seen through the flattening shape of the yield curve.

Business cycles do not die of old age. They die due to restrictive monetary policy or other exogenous shocks. The stimulative tax cuts could extend the current economic expansion to record lengths, but expansive fiscal stimulus with the economy near full employment will lead to a tricky dance for the Federal Reserve.

A move towards domestic energy independence and a generally peaceful global climate have lessened the likelihood of economic shocks. The United States' current unilateral efforts to re-write the global security compact and re-direct global trade flows risk a self-inflicted shock. The odds of this outcome are likely low, but difficult to measure given the limited precedent for this type of policymaking. Odds of a recession over the next 12 months appear subdued absent an escalating trade war, but prognosticators would have also made that assertion in mid-2007.

We are now 18 years into this century, and there have been four years of negative total returns for the S&P 500 (SPY). From 2000 to 2002 during and following the early 2000s recession and 2008 amidst the Great Recession. While it is difficult to time a business cycle, awareness of the point in the business cycle can be important to asset allocation decision making. I hope this historical examination can help Seeking Alpha readers frame their own view of the maturation of the business cycle, an important reference point for forward asset returns.

Disclaimer: My articles may contain statements and projections that are forward-looking in nature, and therefore inherently subject to numerous risks, uncertainties, and assumptions. While my articles focus on generating long-term risk-adjusted returns, investment decisions necessarily involve the risk of loss of principal. Individual investor circumstances vary significantly, and information gleaned from my articles should be applied to your own unique investment situation, objectives, risk tolerance, and investment horizon.

Disclosure: I am/we are long SPY. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.