As we entered June this past weekend, the U.S. economic expansion reached its 10 year mark, tying the 1990’s as the longest stretch of growth in our history. In another month, a fresh record will be hit.
The length of this expansion has caused many people to ask a simple question: how long will this go on for?
By the nature of the U.S. business cycle, we have become accustom to a contraction of some sort every few years. But as the Wall Street Journal has reported, length of expansion does not have a strong correlation with the possibility of recession. With a combination of good policy and some luck, expansions can go on for decades (see Australia’s 28 year period of growth).
What matters more are things like shocks, spending excesses, and monetary policy. How these factors are played during times of growth is a much better indicator of contraction than simply length. Excessive housing investment, for example, helped drive the 2008 crisis.
So where do we stand during our nearly record long expansion? A mix of pros and cons should give us a look.
Potential shocks are the most limiting factors for future U.S. growth. The most detrimental of these would currently come on the trade front, where a growing slew of potential tariffs have created a wave of uncertainty.
The month of May saw an expansion of tariffs on Chinese goods from 10% to 25% as trade negotiations began to falter. These were coupled with new threats of additional tariffs on $300 billion of Chinese goods as well as $60 billion in retaliatory tariffs.
Adding to these tensions in Asia, President Trump announced at the end of May a potential 5% levy on all Mexican imports in an attempt to push Mexico into restricting the flow of Central American migrants coming to the U.S. border. These would then slowly rise to 25% by the fall if Mexico does not take any action.
The new slew of potential tariffs presents a greater threat to the U.S. economy than the original tariffs that were tossed around in 2018. Most of the new products facing levies are consumer goods, like iPhones and other tech from China and automobiles from Mexico. This means that the added costs would likely be passed on more heavily to consumers, threatening the strong consumer confidence that has helped drive the economy over the past few years.
Threatening consumption, the potential levies have helped push down forecasts for economic growth this year. According to the non-partisan Tax Foundation, if all potential tariffs were implemented, the U.S. would lose about 0.8% of economic growth. Adding this to the diminishing effect of tax cuts, growth could very well fall below 2% if all tariffs are implemented.
Already, even without new tariffs being applied, sectors of the U.S. economy are getting hit fairly hard. Agriculture just received an aid package to help offset plummeting prices of products like soybeans that are caught in the mist of trade conflict. Manufacturing appears to be slowing as well. Indexes from IHS Markit and ISM both point to a slow down in production during the first half of 2019.
With current tariffs already having a negative impact, an assault of new ones will for sure be a shock to the economy.
The tariff threat is surely something to worry about, and many investors and consumers are doing just that. However, predictions just have these slowing growth, not throwing us into a recession. There is also no guarantee that they get implemented.
Even if President Trump does move forward though, positives in other areas will likely help maintain growth for a few mow years, even if it weakens.
First there is the central bank. During late stages of growth, the Fed has often raised interest rates in an effort to keep inflation down as wages and spending increase. We live in an unconventional age though, and even with 3% wage growth and record low unemployment, inflation is stubbornly below the Fed’s 2% goal.
This means that it is far more likely that the Fed lowers rates in the near future rather than raise them. And even if nothing were to be done, a funds rate below 2.5% is by no means crippling. This is a good sign since rate increases typically precede recessions.
A recent surge in productivity growth will also help keep our economy growing. Productivity grew at a 1.9% annual rate in the fourth quarter of 2018, far outpacing the 1.3% rate this expansion has seen on average. Fundamentally, an economy can only produce as much as its labor force can put out, so stronger productivity will by nature help businesses produce more and offset added costs of potential tariffs and increasing wages.
So where does this leave our economy? The strong labor market, preferable monetary policy, and improved productivity growth will likely help keep us in the green for another year or two, but not without a hit from potential trade tensions.
This all could change of course if another unforeseen shock happens or the Fed makes a policy mistake. Barring anything drastic though, the expansion looks poised to carry on into record territory. It just might be a hobble rather than a confident stride.