Each year of this enduring slow-growth expansion cycle starting in 2009 has had a growing chorus of doomsayers looking for the next recession. The evidence in forecasting the next economic peak resembles a litany of what if’s to justify a visceral conclusion. Rising interest rates or simply the “feeling” that this expansion is just too darn long are the most popular “reasons” proffered for toil and trouble bubbling around the corner. For years we have heard the sky is falling with regards to the “bond bubble”. Yet interest rates have actually fallen in 2017 despite accelerating economic growth. The yield curve is flattening, yet current yield curve spreads have always been positive for the economy for at least the next 2 years.
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The current 8 and a half year long economic expansion is also branded as long in the tooth – a quirky expression emanating from the practice of examining the length of a horse’s tooth to determine its “age”. Just as popular of a caption is the assertion this cycle is in the late innings of the ball game. Since 1945 the average economic growth phase has lasted just under 5 years and the longest expansions in history were the 9 to just under 10-year expansions of the 1960’s and 1990’s. Thus the current growth phase must clearly run out of steam between mid-2018 and early 2019 at the latest, right? Such logic is a bit irrational. Economic cycles don’t have expiration dates and records are eventually broken. What’s more important are the barometers indicating the stage of the economic cycle we are navigating. What’s clear is that from 2009 to early 2017 our economy performed as if in the early to middle innings of a baseball game and only warming up to the middle innings over the past few quarters as the economy moved above-trend growth over 3%. Our assessment was recently echoed by the successful CEO of US Concrete (USCR) who feels we were in the middle innings and with the tax cut have actually reset to the early innings of economic cycle maturation. Further evidence of a new expansion phase can be seen looking at the late 2015 – early 2016 bottom in Oil Prices and Industrial Production (IP) as the global energy recession was winding down. From that mini-recession, Industrial Production growth rates have moved back into positive territory in 2017.
Mirroring the IP data is the move from contraction to expansion over the past year in New Orders by Manufacturers. This rebound from typical recession levels can be viewed as the start of a new business expansion phase. The small global industrial company we are personally affiliated with coincides with these charts moving from record low backlogs just over a year ago to all-time record high backlogs today, with New Order run rates reaching 9-year highs. This strong rebound we see in our local pipeline is without much of a rebound in the energy sector. Sustaining Oil near $60 may open the floodgates in energy capital spending and add some fuel to the economic fires.
Falling corporate profits often warn of economic weakness and sometimes a pending recession. The energy market collapse from 2014 to 2016 was essentially an isolated recession that weakened overall earnings globally and heightened banking fears and a recession. However, the past year has witnessed an energy rebound and global recovery in profits more indicative of a new expansion phase. European (MSCI) earnings growth are currently outpacing stellar US earnings for the first time in 14 years. With the cloud sector in the early innings of its long-term adoption cycle, we think this rapid tech growth recovery will extend its reach to the consumer and financial sectors and eventually energy before long-term overheating concerns lead to a credit contraction and economic recession.
While global trade always rebounds coming out of a recession, it’s normal to see exports surge in the middle to later innings of an expansion. While US exports bottomed last year, we still have not seen enough growth to stimulate exports significantly. Before the economy overheats with worrisome inflation and credit tightening we may see rising export trade as a sign the economy has entered the final growth phase.
In the later innings of expansions, we naturally see short-term rates rising faster than long rates, flattening the yield curve and pressuring the Stress Index higher. Oddly this expansion still shows excess liquidity, easy credit and a total lack of warning signs for the terminus of this economic expansion.
An esteemed economist and former Federal Reserve Chair Alan Greenspan have again declared 2017 a year of irrational exuberance with concerns about debt and strong opposition to a stimulus or new debt. Greenspan is the boy who cried wolf. While stock market hiccups of 20 to even 30+% can occur at any time due to exogenous events and errant computers, we stay focused on the economic metrics of consumer, corporate and banking liquidity metrics. Quantitative easing may someday become quantitative tightening as the economy strengthens, but as long as animal spirits are subdued enough to keep pricing and credit pressures healthy, we will favor more growth ahead in earnings and eventually equity markets.