20 Aug 2018
The US economic expansion is set to become the longest on record, with the momentum expected to continue beyond 2020 amid strong consumption and employment.
With more than nine years of uninterrupted GDP growth, the current expansion will overtake the 1991-2001 growth cycle by mid-2019 as the most durable since official records were kept.
Far from nearing a turning point, the expansion is set to continue, says Macquarie North America economist David Doyle.
“The expansion's length has contributed to calls that a recession could occur in the next two years," says Doyle. “While the risks are likely to rise in 2020, we suspect it might be still longer before a recession arrives."
An analysis of the health of the economy
To determine the likelihood of a downturn, Doyle monitors six structural economic variables that can signal overheating or vulnerabilities.
Four of these variables - residential investment as a proportion of GDP, the share of construction employment, and the level and change in real interest rates - are well below peaks typically reached ahead of a recession.
“We have not had the sort of fervor you get right before downturns," says Doyle.
Two other variables suggest a recession is possible: the falling unemployment rate of the core working age population (25 to 54 year-olds) and the cyclical business investment share, which has become stretched relative to history.
“While this makes a recession plausible, it remains unlikely for at least the next 12 to 24 months," says Doyle.
Doyle complements his analysis by evaluating a set of 10 leading indicators that track the bond and employment markets, as well as business activity.
These indicators, which can provide a signal up to three years in advance of a downturn, convey a largely healthy message for the next one to two years.
The expansion's length has contributed to calls that a recession could occur in the next two years. While the risks are likely to rise in 2020, we suspect it might be still longer before a recession arrives."
The changing profile of the US economy
Structural changes in the economy may explain the expansion's longevity.
Among them is the increased importance of the services sector – which is less volatile than the manufacturing and construction industries – in the share of total output and employment.
“When it does happen, the next recession is likely to see only a very modest rise in unemployment due to a more resilient sectoral employment composition," says Doyle
Secondly, the US is now positively leveraged to higher oil prices following a boom in domestic crude production.
Demographics provide added resiliency. An ageing population means a lower share of consumer income comes from employment, while social security and private pension plans play a larger role than before. Also, low labour force growth means fewer jobs are required to reach full employment.
Finally, the 2007-2009 global financial crisis provided an additional buffer to the ensuing recovery, says Doyle. The depth of the last recession, combined with prudent monetary policy and moderate credit growth over the past decade, has limited many of the excesses that typically precede a downturn.
“Since 1980, you've had these big build-ups in private credit growth ahead of recessions," says Doyle. “You haven't seen that occur this time."
“People have feared a recession was imminent at a few points in the current cycle, and those fears didn't materialize. This expansion may just keep on going for longer than people expect."
For a copy of the US Business Cycle report, contact your Macquarie representative.