Written by: Chip Corley As of July, the business cycle expansion became the longest in U.S. history. There have been 11 economic growth cycles since World War II averaging 60 months in duration; the current stretch spans 121 consecutive months. Now that this historical milestone has been achieved, how much longer can it continue? Before I try answering this question, here is a brief look back at how we arrived here in the first place.
From 2001 until 2007, the U.S. economy soared due to cheap money and easy credit. Residential housing prices had steadily risen the previous decade, and many believed that home values would never decline. Investing in real estate was argued to be a sure fire way to wealth creation. People were betting their life savings and more that real estate and other capital assets would continue their ascent fueled by excess liquidity. Real estate speculation was at a frenzy. Buying homes with no down payment was the rage. Flippers were buying and trading properties like it was a game of Monopoly. As speculators leveraged up, their indebtedness grew and so did the cost of servicing that debt. The strain from large-scale borrowing and leveraging were more than the system could bare. Then the bubble burst, and asset values spiraled downward; margin calls on collateral exacerbated even more selling; it was the beginning of the end.What followed was our nation's most crippling economic downturn since the 1930s. The great recession was the byproduct of irresponsible spending, unbridled greed, stupidity, and easy money galore. This misbehavior proved to be the right formula for a weapon of mass financial destruction that decimated the lives of many and took years to rectify. Total U.S. output decreased $627 billion; 8.5 million people lost their jobs; home prices sank 30%, and the stock market plummeted 50% from December 2007 through June of 2009. It was the worst of times. Millions of Americans lost their homes, their jobs, their savings, and their self-worth. It took trillions in government bailouts (taxpayers’ money) and financial intervention to stop the bleeding. Fortunately, all bad things come to an end.
Equity markets made a stand in Spring 2009. Instantly, Wall Street sharks and the money power brokers swooped in to buy assets that were now on sale. The multi-billion dollar private equity machine began making enormous investments into foreclosed housing, cratering equity markets, illiquid credits, and commercial real estate. Institutional investors put massive sums on the line that asset prices would stabilize; they did. As prices began to recover these billion dollar bets paid off massively for those brave souls courageous enough to have real skin in the game!Since those fateful days, the tables have turned; the economic output of all U.S. goods and services has risen $3.7 trillion and created 17 million jobs. Housing and equity markets have since rallied 53% and 330%, respectively. The core-inflation rate measured by the Consumer Price Index has remained subdued, averaging 1.8%, well below the 2.3% GDP growth rate, and personal incomes rose 4.14% compounded. Moderate growth in wages, asset appreciation, and economic expansion without inflationary pressures reflect a just right or a Goldilocks economy. The key drivers behind this Goldilocks scenario have been sustained economic development, low unemployment, and stable prices packaged in an interest rate friendly environment. Economically speaking, it is perhaps the best of all scenarios.
How much longer will this party last? Well, considering the great country of Australia has now gone 28 years without a recession, who knows, maybe U.S. policymakers will get it right and this expansion will continue!