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Economy may be lackluster, but it is resilient

15 June 2015

(St. Louis Post Dispatch)

Steve Finerty, chairman of Argent Capital Management in Clayton, recently did some historical research to reassure clients about the economy. In the past 50 years, he found, the economy avoided recession for an average of five years after the Federal Reserve started raising interest rates, five years after wages began accelerating and seven years after housing starts exceeded an annual rate of 1 million.

June 9, 2015 (David Nicklaus)

It may not feel like it, but we’re living through an above-average economic expansion.

That’s above average in length, not strength. The last recession officially ended in June 2009, so this month marks six years of generally forward progress. The average U.S. expansion since 1945 lasted less than five years.

In one more month, we’ll match the length of the previous expansion, the one that ended when the housing bubble burst. The long expansions of the 1980s (more than seven years) and the 1990s (10 years) may even be within reach.

That raises a couple of interesting questions: What would it take to throw this economy into recession, and do the risks increase as a recovery grows long in the tooth?

Ken Matheny, an economist at Macroeconomic Advisers, answers the second question with an emphatic “no.” “We don’t buy into the idea that there’s an inherent time limit on expansions,” he says.

Recessions are caused by policy mistakes or unanticipated shocks, such as an oil crisis or a financial market meltdown. In one sense, the current expansion’s anemic growth rate makes it more vulnerable to such a shock.

“The underlying trend growth is lower now than it was a decade ago,” Matheny explains. “It’s easier, just in a numerical sense, to have one quarter that shows up negative even when underlying trend growth is positive.”

That’s already happened twice, in the first quarters of last year and this year. Last week’s report on gross domestic product showed that the U.S. economy shrank 0.7 percent between January and March.

If GDP were to shrink for two quarters in a row, we’d probably be in a recession. Matheny, however, doesn’t think we’re in any danger of that. His firm projects second-quarter GDP growth of 1.9 percent and thinks growth will accelerate to 3 percent in the second half of this year.

The first-quarter decline was partly weather related, and the economy has plenty of things going for it, from strong job growth to improving financial conditions.

Even government spending, which was a drag on the economy for a few years, is now a source of growth. Fiscal policy doesn’t look as dysfunctional as it did during the debt-downgrade episode of 2011 or the government shutdown of 2013.

“If you look at the U.S., it’s hard to tell a story of an imminent destructive shock that would throw us into recession,” Matheny says.

A shock could come from overseas, if China’s growth rate collapses or Greece pulls out of the euro, but most forecasts don’t include such a calamity. Macroeconomic Advisers thinks U.S. GDP will grow 2.9 percent next year and 2.2 percent in 2017.

That would take this already aging expansion past its eighth birthday. If it somehow surpasses 10 years, it will become the longest in history.

Steve Finerty, chairman of Argent Capital Management in Clayton, recently did some historical research to reassure clients about the economy. In the past 50 years, he found, the economy avoided recession for an average of five years after the Federal Reserve started raising interest rates, five years after wages began accelerating and seven years after housing starts exceeded an annual rate of 1 million.

The first two haven’t happened yet, and housing starts passed the 1 million mark in late 2013. Finerty’s numbers are just averages, but they point to the expansion’s continuing into 2020.

By then, one hopes, we’ll have stopped complaining about how weak the economy is and started marveling at its resilience.