The U.S. economy’s current expansion, now in its ninth year, is the third-longest since World War II. Age alone isn’t cause for worry – just look at Australia’s economy, which has been growing for a world-record 26 years.
So if, as the saying goes, expansions don’t die of old age, then what kills them? In the U.S., it’s usually a combination of significant imbalances in the economy and excessive monetary tightening. For example:
1991–2001 expansion: dotcom bubble burst
1961–1969: Fed tightening plus fiscal tightening in response to Vietnam-related budget deficits
1982–1990: oil price shock following a real estate slump amid sluggish economy
2001–2007: housing market crisis
The current expansion is aging gracefully. We see no major imbalances, thanks to temperate spending and investment by consumers and companies. And the Fed thus far has been taking a very careful, gradual and well-communicated path toward normalization.
However, labor market slack has largely eroded, meaning job growth and output growth are likely to slow. These trends could pressure inflation upward next year, potentially increasing the risk that the Fed raises its policy rate more than investors expect – and perhaps more than economic growth can tolerate.
We don’t expect a U.S. recession over the cyclical horizon, but we are carefully monitoring both the usual and unusual suspects in the inevitable death of the expansion.
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